If you want to withdraw funds from a stock, you will have to sell some or all of the shares of the stock that you own. And when you the sell the shares of a stock, you can incur a tax liability. Whether or not you owe taxes on the withdrawn funds depends on whether you made a profit or loss on the stock sale, as well as other expenses related to the sale.
Stock profits occur when you sell shares of a stock for more than you originally paid for them. For example, if you bought 10 shares of a stock for $10 per share for a total of $100, and sold those shares for $20 each for a total of $200, you end up with $100 profit. The taxes that you pay on the withdrawn stock funds are based on the profit.
Stock losses occur when you sell the shares of a stock for less than you originally paid for them. If you bought 10 shares of a stock for $10 per share for a total of $100, and sold the shares for $5 each for a total of $50, you would end up with a $50 stock loss. You can write this loss off on your tax return to help offset your income tax bill or capital gains.
When determining stock profits or stock losses, factor in any fees that you paid to buy and sell the stock. If you bought 10 shares of a stock for $10 per share for a total of $100, for instance, and paid a $5 fee to a broker, the total stock cost is $105. If you then sell that stock for $20 per share for a total of $200, but pay another $5 fee, the stock sale equals $195. So, the actual earnings on the stock equals $195 minus $105 for a total gain of $90 instead of the full $100.
Gains or Losses
As far as the IRS is concerned, stock profits or losses are considered capital gains or capital losses. These gains or losses are reported separately from your earned income on Schedule D of tax return Form 1040. If you profit from stock, or have a capital gain, during the tax year, you must report all of that income on Schedule D. If you lose money on stock, you may report up to $3000 of the loss in a given tax year. If you lose more than $3000, you must carry the remainder of the loss over to report in the next tax year.
How much you are taxed on capital gains depends on how long you owned the shares before selling them. If you owned the shares for a year or less, they are considered short-term capital gains and are taxed at the same rate as your income. However, if you hold the shares for longer than one year, they are considered long-term capital gains are taxed at a significantly lower rate.