The three ways stocks are taxed
Almost every stock-tax question falls into one of three buckets. First, capital gains — the profit when you sell for more than you paid. Second, dividends — cash the company pays you while you hold. Third, equity compensation — stock you receive from an employer, such as RSUs, ESPP shares or options, which is taxed partly as income and partly as capital gains. Understanding which bucket you are in tells you almost everything about the tax.
Realized vs unrealized
The most important rule in all of stock tax: you are only taxed when you realize a gain by selling. Stock that has doubled but that you still hold is not taxed at all. This is why holding defers tax, why selling is the taxable moment, and why timing a sale — this year or next, before or after the one-year mark — is the main lever you control.
Capital gains: short vs long
When you do sell, how long you held decides the rate. One year or less is a short-term gain, taxed at your ordinary income rate up to 37%. More than a year is long-term, taxed at the preferential 0/15/20% rates. Crossing the one-year line can roughly halve the tax on the same profit. Losses offset gains and, beyond that, up to $3,000 of ordinary income per year — but watch the wash-sale rule.
Dividends: qualified vs ordinary
Dividends come in two flavors. Qualified dividends — from most U.S. companies you have held long enough — are taxed at the same low 0/15/20% long-term rates. Ordinary (non-qualified) dividends are taxed as ordinary income. The distinction is automatic based on the stock and your holding period, and it appears on your 1099-DIV.
Equity compensation is its own world
Stock from an employer follows special rules, and each type is different. RSUs are ordinary income at vesting. ESPP shares tax the discount partly as income depending on how long you hold. NSOs are ordinary income on the spread at exercise. ISOs avoid regular tax at exercise but can trigger the Alternative Minimum Tax. In every case the value taxed as income becomes part of your cost basis — and forgetting that is the most common way people overpay.
The double-tax trap that catches everyone
Across RSUs, ESPP, and options, one mistake recurs: your broker reports a cost basis that is too low (often $0 or just the strike price), so the amount already taxed as income gets taxed again as a capital gain. The fix is always the same — adjust the basis on Form 8949 to include what you already paid income tax on. It is worth checking on every equity-comp sale.
Where to go next
Pick the guide that matches your situation: capital gains if you are simply buying and selling; RSU, ESPP, NSO or ISO/AMT if you have employer stock. Each guide is paired with a free calculator so you can put your own numbers in.