The finance minister in Budget 2018 announced tax on the sale of shares if the profit crosses the value of ₹ 1 lakh. I bought 25 shares of Bajaj Finance 5 years ago on an average buy price of ₹ 150. Now their value stands at ₹ 6 lakh (with total 250 shares). If I sell all the shares and buy new shares with the amount, how will the tax be calculated? Do I still have to pay tax on the profit? Show
—Arvind Judge Beginning 1 April 2018, long-term capital gains (LTCG) arising on the sale of shares listed in India that are held for more than 12 months before sale are taxable, to the extent such LTCG exceeds ₹ 1 lakh in the given tax year, provided securities transaction tax (STT) has been paid both at the time of purchase and when the shares are sold. A special tax rate of 10% (plus applicable surcharge and cess) is payable on such LTCG exceeding ₹ 1 lakh. If you acquired these shares five years ago and paid or will pay STT at the time of purchase and sale, you can opt to use the highest listed price of the shares as on 31 January 2018 in place of the actual cost of purchase, provided the listed price is lesser than the sale value. The resultant capital gain, to the extent it exceeds ₹ 1 lakh, would need to be taxed at 10% plus applicable surcharge and cess. The reinvestment of gains/sale proceeds in the purchase of new shares does not enjoy any tax exemption. Exemption can be explored for such LTCG taxation if the sale proceeds are reinvested in a residential property in India and subject to satisfaction of other specified conditions relating to such reinvestment. I have short-term capital loss from sale of gold ornaments and income from profession under Section 44ADA. How can I disclose this data in ITR3? —Sadik Naniyattu In ITR-3 form, for short-term capital loss (STCL) from the sale of gold ornaments, the details of sale consideration should be mentioned under Schedule CG, in line item 6(a)(ii) of Part A and corresponding cost of acquisition should be mentioned in line item 6(b)(i). The STCL cannot be set off against income from profession under Section 44ADA and can be carried forward (assuming the tax return is filed within the due date) to succeeding eight tax years. The STCL available for carry forward will automatically flow into Schedule CFL of ITR-3. With respect to disclosure of income from profession under Section 44ADA, the details of deemed income should be mentioned under Schedule BP, in line item 36(ii). Also, the details of the income and the nature of profession should be updated in the profit and loss and balance sheet schedules, which are earmarked for taxpayers who do not need to maintain books of accounts. To read more queries, go to livemint.com/askmintmoney Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates. More Less Capital gains are incurred when shares of a stock are sold for more than you paid for them. The exact taxes on these gains will depend upon how long the shares were held. Understanding how capital gains taxes work can help you manage the tax bill incurred from stock sales, which is a smart money move when you’re trying to build wealth. When investing money you should always understand how it could be taxed. Here’s how capital gains tax works with taxes, and how you might avoid a big capital gains tax bill. Learn how you can avoid capital gains taxThe tax code can be thorny and even convoluted. But that shouldn’t be a reason to pay more in taxes. With the right moves, you could actually pay less. Yep. You could pay less in taxes than you think. And one of the best things that can help you potentially pay less in taxes is speaking with a financial advisor. Yeah, sounds boring. But they’ll help you look for ways to save money on your tax bill, make smart investments and plan for retirement. So how do you find a financial advisor? Take this free quiz from SmartAsset. In just a few short questions, it can help you find qualified vetted financial advisors who serve your area based on their cost and specialty. You even earn 3 free consultations with each of your matches, so you can compare them 2 and be fully prepared to pick a financial advisor that’s right for you. Take the quiz What are capital gains taxes?Capital gains as they pertain to stocks occur when an investor sells shares of an individual stock, a stock mutual fund, or a stock ETF for more than they originally paid for the investment. For example, if you buy 100 shares of a stock at $25 per share and later sell them for $40 per share you will have realized a capital gain of $15 per share or $1,500 total on the 100 shares. ETFs and mutual funds can also incur capital gains realized from the sales of the stocks held within the mutual fund or ETF. The Internal Revenue Service defines capital gains as either short-term or long-term:
Note: Capital gains on stocks are taxed differently than capital gains on a home sale. How capital gains on stocks are taxedThe federal tax rates on long-term capital gains vary a bit based on your filing status and your adjusted gross income (AGI). Here are the capital gains tax rates for both the 2021 and 2022 tax years for the various tax filing statuses. The first column indicates the percentage of tax that will be applied to your capital gains. Columns two through five indicate your filing status and income level. Tax year 2021
Tax year 2022
In addition to these rates, there is an additional capital gains tax for higher-income investors called the net investment income tax rate. This rule adds 3.8% to the capital gains tax for investors over certain income thresholds. For 2021, you will owe net investment income tax if your annual income (measured as modified adjusted gross income or MAGI) is above the following thresholds:
7 methods to avoid capital gains taxes on stocksManaging the tax impact when investing in stocks is always a good idea. However, tax considerations should simply be a part of the process and not the driver of your investing decisions. That said, there are many ways to minimize or avoid the capital gains taxes on stocks. 1. Work your tax bracketWhile long-term capital gains are taxed at a lower rate, realizing these capital gains can push you into a higher overall tax bracket as the capital gains will count as a part of your AGI. If you are close to the upper end of your regular income tax bracket, it might behoove you to defer selling stocks until a later time or to consider bunching some deductions into the current year. This would keep those earnings from being taxed at a higher rate. 2. Use tax-loss harvestingTax-loss harvesting is an effective tool whereby an investor intentionally sells stocks, mutual funds, ETFs, or other securities held in a taxable investment account at a loss. Tax losses can be used in several ways including to offset the impact of capital gains from the sale of other stocks. Capital losses are used to offset capital gains as follows:
Any excess losses of either type are used to offset additional capital gains first. Then, to the extent that your losses exceed your gains for the year, up to $3,000 may be used to offset other taxable income. Additional losses can be carried over to use in subsequent tax years. A key point is to ensure that you avoid a wash sale when using tax-loss harvesting.The wash sale rule says an investor cannot purchase shares of identical or substantially identical security 30 days before or within 30 days after selling a stock or other security for a loss. Essentially this creates a 61-day window around the date of the sale. For example, if you plan to sell shares of IBM stock at a loss, you must refrain from buying shares of IBM during that 61-day span. Similarly, if you sell shares of the Vanguard S&P 500 ETF at a loss and then buy another ETF that tracks the same index, that might be considered “substantially identical.” Violating the wash sale rule would eliminate your ability to use the tax loss against capital gains or other income for that year. This rule also extends to purchases in accounts other than your taxable account, such as an IRA. If you have questions about what constitutes a wash sale, it's best to consult your financial advisor. Many of the top robo-advisors like Wealthfront automate tax-loss harvesting, making it simple even for novice investors. 3. Donate stocks to charityDonating shares of stock to a charity offers two potential tax benefits:
4. Buy and hold qualified small business stocksQualified small business stock refers to shares issued by a qualified small business as defined by the IRS. This tax break is meant to provide an incentive for investing in these smaller companies. If the stock qualifies under IRS section 1202, up to $10 million in capital gains may be excluded from your income. Depending on when the shares were acquired, between 50% and 100% of your capital gains may not be subject to taxes. It's best to consult with a tax professional knowledgeable in this area to be sure. 5. Reinvest in an Opportunity FundAn opportunity zone is an economically distressed area that offers preferential tax treatment to investors under the Opportunity Act. This was a part of the Tax Cuts and Jobs Act passed in late 2017. Investors who take their capital gains and reinvest them into real estate or businesses located in an opportunity zone can defer or reduce the taxes on these reinvested capital gains. The IRS allows the deferral of these gains through December 31, 2026, unless the investment in the opportunity zone is sold before that date. 6. Hold onto it until you dieThis might sound morbid, but if you hold your stocks until your death, you will never have to pay any capital gains taxes during your lifetime. In some cases, your heirs may also be exempt from capital gains taxes due to the ability to claim a step-up in the cost basis of the inherited stock. The cost basis is the cost of the investment, including any commissions or transaction fees incurred. A step-up in basis means adjusting the cost basis to the current value of the investment as of the owner’s date of death. For investments that have appreciated in value, this can eliminate some or all of the capital gains taxes that would have been incurred based on the investment’s original cost basis. For highly appreciated stocks, this can eliminate capital gains should your heirs decide to sell the stocks, potentially saving them a lot in taxes. 7. Use tax-advantaged retirement accountsIf stocks are held in a tax-advantaged retirement account like an IRA, any capital gains from the sale of stocks in the account will not be subject to capital gains taxes in the year the capital gains are realized. In the case of a traditional IRA account, the gains will simply go into the overall account balance that won’t be subject to taxes until withdrawal in retirement. In the case of a Roth IRA, the capital gains will be part of the account balance that can be withdrawn tax-free as long as certain conditions are met. This tax-free growth is one reason many people opt for a Roth IRA. You can open a retirement account using one of our picks for the best investment apps, such as Stash 1 or Public. FAQsIf you sell shares of stock for a price greater than the amount you paid for the shares, you will be subject to capital gains no matter how long you have owned
the shares. If you’ve held the shares for less than one year, the gains will be considered short-term. If you’ve held the shares for at least a year, they will be considered long-term. The advantage of paying long-term capital gains taxes is that the rates are lower than short-term capital gains taxes for most taxpayers. If you don’t sell shares of stock that you own, there are no capital gains taxes due, even if the shares
increase in value. If you hold the stocks until you die, they would pass to your heirs, who may or may not owe taxes on the inheritance. If the stock pays a dividend, these payments would be taxable to you while holding the shares, but this is not a capital gains tax. You typically don’t have to report that you own shares of a stock on your taxes. You do have to report any income earned from those shares
whether from capital gains due to the sale of the shares or from dividends earned while holding the shares. Failure to report this income and pay the appropriate taxes could be a crime. Brokerage firms will directly report the proceeds from the sale of stock to the IRS. The company issuing the dividend will also report this income to the IRS. If these amounts are not reflected on your tax return, this could be a red flag for the IRS. Bottom lineInvesting in the stock market can be a solid wealth-building tool for some investors. But it’s important to understand how stocks can be taxed and to take those tax implications into account in your financial planning. Incurring capital gains means that you have sold shares of a stock for more than you paid for it, but proper tax planning can help manage your tax liability. If you have questions about your specific tax situation, you might consider speaking with a tax advisor. Learn how you can avoid capital gains taxThe tax code can be thorny and even convoluted. But that shouldn’t be a reason to pay more in taxes. With the right moves, you could actually pay less. Yep. You could pay less in taxes than you think. And one of the best things that can help you potentially pay less in taxes is speaking with a financial advisor. Yeah, sounds boring. But they’ll help you look for ways to save money on your tax bill, make smart investments and plan for retirement. So how do you find a financial advisor? Take this free quiz from SmartAsset. In just a few short questions, it can help you find qualified vetted financial advisors who serve your area based on their cost and specialty. You even earn 3 free consultations with each of your matches, so you can compare them 2 and be fully prepared to pick a financial advisor that’s right for you. Take the quiz Author Details
Roger Wohlner In addition to his bylined articles on sites like TheStreet, ThinkAdvisor, and Investopedia, Roger ghostwrites extensively for financial advisors, investment managers, and financial services companies. |