How is the profit of a sale of stock calculated for taxes if the initial investment amount is divested, and the profit remains invested

Question

I hope the title is accurate/descriptive. Open to suggestions edits if something makes more sense after reading.

The best way I can describe this is with a scenario. So:

1. $5,000 is invested in stock A

2. Stock A increases in value by 20%($1,000) over the next 3 months

3. Stock A is sold and $5,000 taken out of the brokerage account as cash on hand while $1,000 is invested in stock B

4. It's the end of year and $1,000 + profit/loss is still invested

Would I pay short term capital gains on $1,000, and long term capital gains on profit from the 'left over' $1,000 when sold? Or no tax yet as the profit isn't realized since it was reinvested into a "security of the same type", and long term capital gains after Stock B is sold.

Another way to phrase this might be: "If money is removed from an investment after it's increased in value with exact balance of the profit still invested, is the profit still invested considered your capital gain, or would the profit be considered a part of the divested money, and what's left a portion of the initially deposited amount?"

Answer 1

Assuming this is a standard brokerage account and not a tax-deferred account like an IRA, whether you took any out in cash or reinvested it is irrelevant. You made a $1,000 gain in less than one year from your sale of Stock A. That is what you'll pay short-term capital gains tax on.

If your sale of Stock B is sold within one year if its purchase, you'll also pay short-term gains on that. The "short vs long" distinction is per security (and even per lot within a security).

There is the concept of "substantially identical securities" that does not reset the clock, but they have to be virtually identical, like a converted class of shares on the same company. Changing investments from stock in one company to another would not qualify.