Do You Pay Taxes On Capital Gains That Are Reinvested? (2024)

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Turning a profit on an investment is always a pleasure. The capital gains taxes you have to pay? Not such a pleasure.

If you want to find a loophole to avoid those pesky taxes, you may be wondering — Do you pay capital gains if you reinvest? When do you pay taxes on stock gains?

What happens if you don’t file Robinhood taxes, or taxes from other personal investments? And perhaps most importantly for longer-term investors, do I pay taxes on stocks I don’t sell?

If you sell a stock and make a profit, it’s tough to avoid capital gains taxes. The good news is that there are ways to minimize the impact of taxes when you reinvest capital gains. But to leverage them, you need some foundational knowledge.

That’s what you’ll get in this post. You’ll learn all about taxes on stocks, including how reinvested capital gains are taxed, and how you can use that information to your benefit…

Do You Pay Taxes On Capital Gains That Are Reinvested?

The bottom line: You will almost certainly have to pay tax even on capital gains you reinvest. However, there are ways to minimize your capital gains tax on reinvested dividends.

One way? Get a Roth IRA and invest in dividend stocks. When you invest in dividend-paying stock in a brokerage account, dividends are taxed at your regular income tax rate. But in the Roth IRA, you avoid taxes on dividend payments.

Additionally, you can participate in dividend reinvestment and tax-loss harvesting plans to reduce your tax burden.

Your payments will also be affected by whether your capital gains are considered qualified or unqualified, aka short-term or long-term, by the IRS.

Basics: What are Capital Gains & How Do They Work?

Let’s dig into it.

How are Stocks Taxed?

If you’re wondering how stocks are taxed, the answer can be complicated.

Taxes on stocks (or rather, taxes on stock profits – losses are not taxed)can be categorized in a few different ways, depending on how you’ve invested them, and where the profits end up.

• Long-term, or qualified investments (held for over a year) are taxed at a lower rate — usually about 15%, but potentially higher or lower depending on your taxable income
• Unqualified or short-term (less than a year) investments are taxed at a higher rate — as much as 37%
• Gains in a long-term fund, like a traditional IRA, are not taxed until you take money out. If your stocks are in an IRA or 401k, you’ll only have to pay tax on the funds you withdraw. There is no capital gains tax on a 401k for a fiscal period where you haven’t withdrawn any money from it. Do you pay capital gains if you reinvest? Yes. But if the stocks remain in a fund, no.
• As noted earlier, dividends are your friend with a Roth IRA. Unlike with a traditional brokerage account, with a Roth IRA, you avoid taxes on dividend payments from stocks.

If you and your accountant are trying to figure out how much you get taxed on stocks in a given tax period, you’ll need to figure out your net total capital gains (the difference between your gains and losses).

What is Tax-Loss Harvesting & How Does it Work?

The concept behind tax-loss harvesting is simple. It involves selling an investment, or multiple investments, at a loss. The reason? To offset your capital gains tax burden from dividends you’ve realized by selling other assets at a profit.

Here’s an example: let’s say you bought stock at a dollar per share. Shares have fallen to fifty cents. You can sell some of that stock at a loss of fifty cents per share.

Then, you subtract the money you lost from the money you gained selling other assets. This will result in lower net total capital gains — and as a result, lower capital gains tax.

If you’re planning on using tax-loss harvesting to pay less in capital gains tax, you will need to be careful which investments to sell at a loss, to avoid damaging your overall portfolio.

For instance, if the hypothetical stock you sold at a fifty cents-per-share loss is likely to increase in value over the coming year, don’t sell it. But if it’s likely to lower in value even further, it can be smart to sell it now to offset your taxes.

Empower is a great options, but it’s not the only option. If you’re interested in management tools that can help you leverage the power of tax-loss harvesting, here’s a more complete review of our top picks:

Betterment

• Overall rating: 4/5
• Features: Socially-conscious portfolio options, automated investing, automated tax optimization
• Who it’s good for: New investors, socially conscious investors, those with limited time to devote to portfolio management, investors looking for tax assistance

Betterment’sautomated investment portfolio plans can build your customized portfolio for you. There are options for socially-conscious portfolios, portfolios with diverse options including stocks, bonds, and crypto, and varying levels of risk exposure.

Betterment also offers automated tax optimization–their portfolios are designed to combine taxable and non-taxable accounts (like IRAs), and rebalance when you receive dividends, to save you on taxes.

Empower (formerly Personal Capital)

• Overall rating: 4.5/5
• Features: Personal advisor program, free options, tax assistance
• Who it’s good for: Long-term investors, new investors, investors saving for retirement

Sharesight

• Overall rating: 4/5
• Features: Free starter portfolio options, individual support, custom groups, professional management options, tax reports
• Who it’s good for: Investors with international portfolios, new investors, accountants and other financial professionals

Sharesight is geared towards individual investors and financial professionals. Their system allows customers to choose from free basic portfolios, all the way up to professional plans and plans to manage multiple portfolios with unlimited holdings, including multinational portfolios.

Sharesight also offers personalized investment advice and on-demand tax reports.

Ziggma

• Overall rating: 4.5/5
• Features: Free research-based stock screener, climate scores for different investments, tracking across multiple accounts
• Who it’s good for: Environmentally-conscious investors, investors with a large and/or diverse portfolio, investors looking to expand

To the best of my knowledge, Ziggma does not offer specific tools for tax-loss harvesting. However, this portfolio management tool can help keep you organized and make the most of your investments — a valuable service in and of itself.

Ziggmais a totally-online portfolio management tool designed to help you make smart choices when buying or selling stock, and stay organized as you track your portfolio.

Ziggma offers scores on individual investments and your overall portfolio, and screeners to help you make informed purchase decisions. Ziggma also offers climate scores on every stock, to help users who want to invest in environmentally-sustainable businesses.

Every Question You Ever Had About Capital Gains

Do you pay capital gains if you reinvest?

Do you pay taxes on reinvested dividends? Yes. Any realized capital gains, reinvested or not, are subject to capital gains tax. Before you reinvest capital gains, you should bear this in mind to plan for your tax burden.

If you sell stock and reinvest, you do pay taxes, assuming that you are making a net total profit. So you may want to set some money aside to meet your tax obligations. You may consider tax-loss harvesting and other tax minimization strategies.

By the way, if you’re wondering what happens if you don’t file Robinhood taxes, or other personal investment taxes — don’t do it. You’ll be penalized!

How do you reinvest capital gains?

It’s worth taking the time to plan for how you’re going to reinvest your capital gains before you sell a stock.

To reinvest capital gains, you’ll need to realize the gains by selling some or all of the stock. Then, you can use the profits to buy more stock, or bonds, or even a different type of asset like real estate.

When do you pay capital gains tax on stocks?

If you’re new to investing, you may be wondering — When do you pay taxes on stocks? Do I pay taxes on stocks I don’t sell? How do I pay capital gains tax? Do you pay capital gains if you reinvest?

Here’s the most important thing to know: You don’t pay capital gains tax (or any tax at all) on stocks until you sell them. Gains from stocks you haven’t sold are considered unrealized and aren’t taxable.

Once you’ve sold stock, though, you’ll owe capital gains taxes on any profit you’ve made.When you pay taxes, you’ll have to pay up.

What’s the tax rate for investment income?

Investment income is taxed depending on your income level. There are different tax rates for income from short-term investments, which have been held for less than a year, and long-term, or year-or-longer, investments.

According to the IRS, most people’s capital gains tax is at a rate no higher than 15%of their net total capital gains.

How do I calculate capital gains tax?

If you’re doing your own taxes (rather than working with an accountant), you’ll need to calculate your capital gains tax. Programs like TurboTax can help you do this automatically.

Your total capital gains tax comes from adding together all of your investment gains (these can be from selling stocks, bonds, real estate, etc.) and subtracting any investment losses for the tax year.

Once you’ve done this, the final number will be your net total capital gains. This is the income you’ll pay capital gains tax on.How much capital gains tax will depend on your total earnings.

How can I avoid capital gains tax?

How to sell stocks without paying taxes? It’s an intriguing question, but people say “death and taxes” are inevitable for a reason.

You will have to pay capital gains tax on stocks you sell at a profit. If you sell stocks at a loss, though, you won’t owe any capital gains tax, as you won’t have made any gains.

Offsetting your capital gains tax with losses is how tax-loss harvesting works, and can be an effective tool to minimize your capital gains tax.

Be careful, though, not to sell stocks at a loss if they are likely to go significantly up in value in the coming months or years. This may cost you money and opportunities in the future.

What happens if I don’t pay taxes on stocks?

Perhaps you’re new to investing. Thanks to apps like Robinhood, more and more people are starting to trade stocks, with Robinhood alone having roughly 23 million usersin 2022.

With so many people just getting involved in trading, some newer investors may not realize they need to pay taxes on the stocks they trade, and may not be sure, for instance, what happens if they don’t file taxes on their Robinhood investment earnings.

One advantage of trading stocks through an app is that every year you trade with them, you’ll be issued a 1099, which tracks your total earnings for the taxable year.

Robinhood tax calculations can vary depending on if you’ve enrolled in some of their personal finance programs, or are using them purely for trading.

However you trade, if you don’t pay taxes on stock profits, you’ll get a letter from the IRS saying how much you owe, often with additional fines for failure to pay on time.

Even if you don’t get a notice, if you realize you owe on stock dividends from a prior tax year, you should pay them as soon as possible to avoid additional fines and interest.

Final Word:

So, do you pay capital gains if you reinvest? Whether you’re reinvesting your realized gains, or holding on to your dividends, realized capital gains are a part of your taxable income.

However, a sound financial strategy, developed on your own or through a portfolio management system, that includes long-term investment to minimize tax rates, strategic use of tax-loss harvesting, and thoughtful planning of when to realize your gains can minimize your tax burden and maximize your profits.

Empower Personal Wealth, LLC (“EPW”) compensates WallStreetZen.com for new leads. WallStreetZen.com is not an investment client of Personal Capital Advisors Corporation or Empower Advisory Group, LLC.

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