Take stock of potential taxes

Q: Can I avoid a capital gains tax when I sell?

A: The capital gains tax you’ll owe generally depends on two main factors: your adjusted gross income and how long you owned the stock. Profits earned on stocks you held for a year or less are considered short-term capital gains and are taxed at your marginal tax rate, or bracket. But if you held the stock for at least a year and a day, the profit qualifies as a long-term capital gain and is taxed at more favorable rates.

Having said that, there are three main reasons investors may not have to pay capital gains tax.

First, if you’ve owned the stock for more than a year and you fall into the 10% or 15% tax bracket, your long-term capital gains tax rate is 0%. The second way is if you own the stock in an IRA or other tax-advantaged account. If this is the case, you won’t owe any capital gains tax on the sale this year, but if it’s a traditional IRA, your eventual withdrawals will be taxable.

Finally, if you have any capital losses, you can use them to offset your capital gains. In other words, if you sell one stock at a $5,000 profit and another at a $5,000 loss, you won’t owe any capital gains tax. For this reason, if you do decide to sell your stock at a profit, check your portfolio for any losing stock positions you wouldn’t mind getting rid of — a strategy known as tax-loss selling.

If none of these situations apply to you, you probably can’t avoid paying capital gains tax.