What happens when you sell stock in an IRA?

If you are a stock trader, you may want to know what happens when you sell stock in an IRA. Here is how you can trade stocks and the tax implications.

3 min read

An IRA is a retirement account that allows taxpayers with earned income to save part of their salary for their retirement. One of the features that make an IRA attractive is the wider pool of investment options that it provides. You can invest in different types of investments such as stocks, bonds, mutual funds, tax deeds, etc.

When you sell stocks in your IRA, you won’t owe income taxes or capital gains tax on the investment earnings provided they remain in the account. Since the earnings are not taxable, you won’t be required to include these earnings as income when filing your annual tax return. You will only pay income taxes on the stock profits when you withdraw funds from an IRA

Trading Stocks in IRAs

IRAs are similar to brokerage accounts in terms of the investments you can trade in your account. The IRS allows investors to buy and sell stocks in a traditional and Roth IRA like they would with a brokerage account. However, there are certain restrictions on IRA investments such as using the IRA as collateral and buying collectibles such as art, stamps, coins, and rugs.

For example, if you buy stocks for $1000, and sell them for $1,500, you will have earned a profit of $500. In a brokerage account, this profit would be included in your income for the year, and you would be taxed at your tax bracket, or capital gains tax rate if you held the stocks for more than one year. However, if you trade stocks in your IRA, you can avoid paying taxes if you continue holding the investment earnings.

If you sell the stocks at a loss, you will be allowed to deduct the losses incurred against the gains in a taxable brokerage account. However, if you sold stocks at a loss in an IRA, you won't be allowed to claim the losses against the gains reported in the IRA.

Does selling stocks count in IRA as income?

An IRA is a tax-advantaged retirement account, and this advantage applies to the tax status of your stock investments. Usually, you can invest in stocks using your traditional or Roth IRA to generate investment income. You can earn dividend income from holding stocks, as well as profit when you sell shares of stock.

When you withdraw money from an IRA, including the stock profits, the withdrawal is considered an income, and you will owe income taxes on the money. Income taxes are due in the year when the money is withdrawn, and this means that profits from the sale of stocks are due when they are withdrawn, not in the year when they are sold. The IRS requires IRA owners to leave their contributions and investment earnings in the IRA until they reach age 59 ½. If you are younger than 59 ½ at the time of withdrawal, you will pay a 10% penalty tax for early withdrawal.

Can I sell and re-buy stocks in an IRA on the same day?

If you are a day trader, you may want to enter and exit multiple stocks per day. If you have an IRA, you can use the IRA funds to buy, sell, and re-buy stocks in your retirement account as frequently as you like in a day. Using an IRA to trade can help you postpone paying taxes on the profits earned from the sale of stocks, and it eliminates the need for tax reporting.

Trading with an IRA reduces the amount of paperwork that you have to deal with during the tax year. Usually, when trading stocks using a taxable brokerage account, you must report all capital gains, dividend income, and interest income on the respective IRS forms when filing your annual return. However, with an IRA, you can avoid the paperwork completely, since the IRS taxes IRA withdrawals at your marginal tax rate.  

Taxes on stock sales

One of the advantages of using an IRA to trade stocks is that you can postpone paying taxes on stock sales in the year of sale. You don’t have to pay taxes on the sale transaction until when you withdraw funds from your IRA. Once you decide to make a withdrawal, the stock profits will be reported as ordinary income, and you will be taxed at your tax bracket rate.

In comparison, when you trade with a brokerage account, you will have to pay capital gains tax on stock profits if you held the stocks for more than one year. If you held stocks for less than one year, you will pay tax on the stock profits at your ordinary income tax rate. Therefore, you would pay higher profits when trading stocks in a regular investment account than when trading stocks in an IRA.

Will you pay taxes when you sell stocks in a Roth IRA?

If you use a Roth IRA to trade stocks, you can avoid paying taxes on the profits earned from trading stocks. As long as you qualify to take qualified distributions from a Roth IRA, you can avoid paying taxes on dividends and capital gains. To be eligible to take a qualified distribution, you must be 59 ½ or older and you must have owned the Roth IRA account for at least five years.