The Internal Revenue Service claims a percentage of practically every dollar you make, including stock investment profits. Profits from trading stock fall into the IRS's "capital gains" category for tax purposes. The IRS taxes capital gains at advantageous long-term rates or at your income tax rate for short-term investment profits.
Long- and Short-Term
If you hold stock for more than a year, you have a long-term investment. If you hold the stock for less than a year, the IRS considers your profits to be short-term capital gains. The IRS considers the day you buy and the day you sell to be part of the holding period.
If you realize a short-term profit on stocks, the IRS takes out the same percentage that it takes out of your income. Depending on how much income you report that tax year, the IRS can claim 10, 15, 25, 28, 33 or 35 percent of the stock profit. Most Americans fall into the 25-percent tax bracket. Note that while you can deduct certain expenses and claim credits and other exemptions to reduce your income tax bill, you cannot do the same on stock profits.
If you hold on to your stock for a year, the IRS takes much less money out of your profits. Most Americans can expect a long-term capital gains tax rate of 15 percent. People who make very little may not have to pay any taxes at all, while the rate on some special types of investments can be as high as 28 percent.
Stocks in retirement funds receive even more favorable rates. Stocks in traditional IRAs still trigger tax consequences, but by the time most Americans reach the age where they need to withdraw money by selling stock, their income rates are in the 15 percent bracket -- or lower. Roth IRAs do not let you deduct contributions from your income taxes, but any gain from stocks in the account comes entirely tax-free.