Do You Have To Report Free Stocks on Taxes?

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You have stocks you didn’t buy. Since stocks are investments (that is, they can potentially earn you income in the future), you’re wondering if they’re taxable even if they cost you 0 dollars.

You don’t always have to report free stocks on taxes. If they’re a personal gift from another individual or a company that gives you stock options you don’t exercise, they’re not taxable. Stocks only become taxable when you exercise the attached option or sell the shares through the open market.

In the next sections, I will further explain whether free stocks are taxable or not. I'll also discuss how stocks, in general, are taxed and what taxes apply to them. 

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Are Free Stocks Taxable?

When you receive free stocks, you don’t report them on your tax returns right away. Whether they’re taxable or not depends on what you do with them afterward.

Free stocks aren’t always taxable. If you have them on hand and don’t do anything with them right away, you don’t have to report them on your tax returns.

But if you receive dividends or sell stocks on the open market, your stocks become taxable.  To understand the taxation rules on free stocks, you need to know how taxation generally works for shares.

Keep reading to learn more.

How Are Stocks Taxed?

Let’s backtrack a bit and explain why stocks are taxable in the first place. Stocks represent shares of a company. In other words, if you own a stock, you essentially own part of a company.

Stocks become taxable when you receive income from them. When you receive dividends from the company that issued the shares or sold the stock via places like the New York Stock Exchange, you may or may have to pay taxes on your shares.

In most cases, you pay taxes on dividends and capital gains. Let’s have a quick overview of those below.

Calculate Your Dividend Tax

If you receive income from dividends, you pay taxes on them depending on whether they're "qualified" or "non-qualified."

Check Whether You Have Qualified Dividends

You have qualified dividends if:

  • A U.S.-based or foreign company listed on a U.S. stock exchange issued your stock; and 
  • You have owned the stock for more than 60 days within the 121-day holding period, which starts 60 days before the ex-dividend date. The ex-dividend date marks the first date you purchase a stock, and the proceeds go to the seller. 

As of 2022, qualified dividend tax rates are as follows based on your annual income and filing status.

Qualified Dividend Tax Rates for 2022

Rate

Single

Married Filing Jointly

Married Filing Separately

Head of Household

0%

$0 - $41,675

$0 - $83,350

$0 - $41,675

$0 - $55,800

15%

$41,676 - $459,750

$83,351 - $517,200

$41,676 - $258,600

$55,801 - $488,500

20%

$459,751 and above

$517,201 and above

$258,601 and above

$488,501 and above

Check Whether You Have Non-Qualified Dividends

Also known as ordinary dividends, non-qualified dividends don’t meet the two “qualified” criteria mentioned above. If you earn income from non-qualified dividends, you pay the standard tax rates for ordinary income.

As of 2022, your non-qualified dividend tax rates based on your total annual income and filing status are as follows:

Non-Qualified Dividend Tax Rates for 2022

Rate

Single / Married Filing Separately

Married Filing Jointly

Head of Household

10%

$0 - $10,275

$0 - $20,550

$0 - $14,650

12%

$10,276 - $41,775

$20,551 - $83,550

$14,651 - $55,900

22%

$41,776 - $89,075

$83,551 - $178,150

$55,901 - $89,050

24%

$89,076 - $170,050

$178,151 - $340,100

$89,051 - $170,050

32%

$170,051 - $215,950

$340,101 - $431,900

$170,051 - $215,950

35%

$215,951 - $539,900

$431,901 - $647,850

$215,951 - $539,900

37%

$539,901 and above

$647,851 and above

$539,901 and above

Find Out if Dividend Tax Exemptions Apply to You

There are three instances where you don’t have to pay taxes on dividends:

  • You hold your dividends in a retirement account or college savings plan;
  • Your “dividend” is a return of capital, meaning the company doled it out from its capital rather than its earnings; or
  • You fall under a tax bracket exempted from dividend tax.

Compute Your Capital Gain Tax

You don’t pay taxes when you buy or receive stocks for free. But when you sell a share, you have to pay capital gain tax.

To calculate your capital gain tax, take the value of the stock at the time you bought it, then subtract that from the stock value at the time of sale. 

For example, if you bought the stock for $100 and sold it for $110, your capital gain (and basis for your tax) is $10. If you incur a capital loss instead of a capital gain (e.g., the buy price is $110 and the selling price is $100), you can use the loss to offset any gains you earned and lower your taxes owed. 

You’ll pay either a short-term or long-term capital gain tax when you sell a stock. Generally, the short-term tax is larger than the long-term one to encourage stockholders to hold on to their shares for as long as possible.

Consider Whether Short-Term Capital Gain Tax Applies

If you sell your stock at a profit less than a year after you bought it, you’ll pay the following 2022 short-term capital gain tax rates according to your income and filing status.

Short-Term Capital Gain Tax Rates for 2022

Rate

Single / Married Filing Separately

Married Filing Jointly

Head of Household

10%

$0 - $10,275

$0 - $20,550

$0 - $14,650

12%

$10,276 - $41,775

$20,551 - $83,550

$14,651 - $55,900

22%

$41,776 - $89,075

$83,551 - $178,150

$55,901 - $89,050

24%

$89,076 - $170,050

$178,151 - $340,100

$89,051 - $170,050

32%

$170,051 - $215,950

$340,101 - $431,900

$170,051 - $215,950

35%

$215,951 - $539,900

$431,901 - $647,850

$215,951 - $539,900

37%

$539,901 and above

$647,851 and above

$539,901 and above

Check Whether You Have To Pay Long-Term Capital Gain Tax

If you sell your stock at a profit at least a year after you bought it, you’ll pay the 2022 long-term capital gain tax rates as follows:

Long-Term Capital Gains Tax Rates for 2022

Rate

Single

Married Filing Jointly

Married Filing Separately

Head of Household

0%

$0 - $41,675

$0 - $83,350

$0 - $41,675

$0 - $55,800

15%

$41,676 - $459,750

$83,351 - $517,200

$41,676 - $258,600

$55,801 - $488,500

20%

$459,751 and above

$517,201 and above

$258,601 and above

$488,501 and above

Conclusion

By themselves, free stocks aren’t taxable. However, if the dividends you earn on your shares meet specific criteria, or you sell the stock and incur a gain or loss, you have to report the result and pay taxes accordingly.

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