Selling investments in a taxable brokerage account can have important tax consequences, especially for those managing a diverse portfolio outside of retirement accounts. While taxes aren’t the only factor to consider when deciding whether to sell, they can influence the timing and strategy behind your investment decisions.
Understanding how gains, losses, and holding periods are treated by the IRS can help you work with your advisor to make more informed, tax-aware choices.
Capital Gains and Holding Periods
When you sell an investment for more than you paid, the profit is called a capital gain, and it’s typically taxable. If you held the investment for more than one year, the gain is usually taxed at long-term capital gains rates, which may be lower than ordinary income tax rates. If the asset was held for one year or less, the gain is generally considered short-term and taxed at your ordinary income tax rate.
This distinction matters, especially for high-income investors who may see a significant difference in tax liability between short- and long-term gains.
What About Capital Losses?
If you sell an investment for less than you paid, you may realize a capital loss. These losses can be used to offset gains in the same tax year – and, if losses exceed gains, a portion may be used to offset ordinary income, with the remainder carried forward to future years.
Losses can be part of a broader strategy, such as tax-loss harvesting, but are only effective when considered alongside your full financial picture.
Other Considerations in a Taxable Account
- Dividends, interest, and distributions from mutual funds or ETFs may also be taxable, even if you don’t sell anything.
- Selling more complex assets – such as options or limited partnership interests – can carry different tax treatments. It’s important to understand what applies in your specific situation.
- Certain transactions may trigger state and local tax consequences, particularly if you live or work in a high-tax jurisdiction.
How Foster & Motley Can Help
At Foster & Motley, we take a coordinated approach to investment management and tax planning. Rather than focusing on short-term decisions, we help clients build thoughtful, tax-aware strategies that consider asset location, timing, and long-term goals.
We don’t believe taxes should drive your investment decisions, but they should inform them. By understanding how taxable events fit into your broader wealth management plan, your advisor can make choices that are intentional, not reactionary.
Want to take the guesswork out of managing your taxable portfolio? Schedule a discovery call to learn more.
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