Any profit you make from selling your stock is taxable by the IRS (Internal Revenue Service). It is illegal to not pay tax on the stock market profits but there are some strategies to avoid them. The following are 4 ways you can use to avoid tax on your stock market profits.
- Donate Your Shares to a Charity Organization
One way to avoid tax on your stock market profits is to donate your shares to charity. Doing so prevent you from having to declare your stock profits as taxable capital gain. If you sell the stock, you will be obliged to pay the capital gains tax. Donating the stock to a charitable organization also enable you to claim a deduction of the share value in the market. This method will only work for stocks that have been held for more than 1 year. If you only want to donate a small portion of your shares, you can select from the list of charity trusts of your broker. All you need to do is to donate a block of your appreciated stocks and it will be used to fund many small gifts over a span of a few years.
- Transfer the Stock to a Relative
Giving your stock to a relative with low tax bracket can help you to avoid tax. It will be up to the new owner to sell the stock. The new owner will be responsible for paying the tax on the stocks profits. The gains will be taxed at a rate as low as 0% in the first year when the new owner sell the stock. This only work if your relative is not a student and above 24 years old. Every year, you can give a tax excluded gift that worth up to $14,000 for per individual in your family. You must make sure that you are giving the stock to someone you trust as they will legally possess them. If you are not sure whether the person will give you the money back, you should find another person.
- Leaving Your Stocks to Loved Ones After Death
If you are already old, you can leave the stocks to your loved ones in the will. The fair market value of the stock at the time of your death will be used as the capital gains basis. In this way, only the increases in the stock profits beyond the date of the death will be taxed. Usually, the gains taxable on the increased value of the stock is minimal. This happens especially when the stocks are sold soon after the demise.
- Hold onto the Stocks in Long Term
You only pay tax when you sell the stocks at a higher price than the original price you bought. Therefore, if you don’t want to pay tax, you should hold on to your stock for long term instead of selling it. The benefit is that the stocks value may increased to a better price in the near future.
In conclusion, no one likes to pay tax. Every investor is looking for a way to lower tax. When the next tax season arrive, make sure you do all you can to lower tax and keep all the profits in your pocket.