16

Let's suppose one sells an asset for a $200,000 profit after holding it for 10 year but then immediately sinks the entire sale price into another asset. Is one still expected to pay the capital gains tax? What cash is one expected to pay the taxes from?

How do tax liabilities work in this scenario?

10
  • 65
    “Oh sorry I spent all my money” was never a sufficient excuse for not paying taxes.
    – Aganju
    Dec 22 '20 at 1:26
  • 2
    @Aganju I think that comment needs a "Rules for thee, not for me" footnote.
    – MonkeyZeus
    Dec 22 '20 at 17:51
  • One issue related to this, I believe, is that funds that are contained within a retirement account do not have their gains taxed when selling off within it. Dec 22 '20 at 22:29
  • 2
    The LT capital gains tax is a tiny fraction of asset value. Say you invest $5000 and it grows to $10,000, you sell/buy another investment. The gain is only $5000, and the capital gains tax is, say, 10% of that. On a $10,000 investment, $500 is couch cushion change. Dec 23 '20 at 1:50
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    @Harper-ReinstateMonica: $500 is 5% of $10,000. I wouldn't call 5% "couch cushion change".
    – sharur
    Dec 23 '20 at 20:43
47

Buying another asset makes no difference, you still owe capital gains tax on the sale.

What cash should you use? If you didn't have other cash to pay the taxes you should have kept some of the cash from the sale to pay taxes and not reinvested it all.

3
  • From a theoretical standpoint, couldn't a person A create a corporation B, which does the investing, then take out the profits only once every N years or so to pay taxes on those? Presumably corporation B will have to pay taxes as well, but I believe it would be able to at least offset losses in year N with profits in year N+1 (so paying 0 taxes both years) as opposed to an individual who would pay 0 tax in year N but non zero in year N+1
    – Ant
    Dec 24 '20 at 17:52
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    @ant both corporations and individuals can claim eligible losses as reductions of income. It is not clear where the benefit of your plan is. This also doesn't seem relevant to the question or this answer in particular. Dec 24 '20 at 18:33
  • @Grade'Eh'Bacon I did not know inidiviiduals could do that. Thank you for clarifying!
    – Ant
    Dec 25 '20 at 7:02
24

It seems to me you are thinking of the 1031 Exchange which offers deferral of the gain if the proceeds are all invested in the next property. This is for (rental) real estate, not stocks. A similar rule applied to one's home, but that law is long gone, and instead there is an exemption under certain conditions.

21

You didn't mention what the asset was.

For non sheltered securities, their sale is a tax event whether it's a realized gain or loss regardless of what the holding period was or what you subsequently did with the money.

If the asset was say a property, the tax status would depend on the amount of the gain and whether it was your home or an investment property.

The IRS is not concerned with where you get the cash if taxes are due. You owe them and it's your responsibility to pay them.

-4

I believe that, at least for stocks, you do not have to pay, or for that matter report CGT, if you are in the lowest tax brackets, perhaps up to 15%. I am quoting from memory, you should double check this.

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