I bought a company for $71 5 months ago. It is now over $100 but I am afraid it might fall. I plan to sell only enough to get back the money I put into the stock and own the gained amount until it is reaches the long-term capital gains tax rate.

Am I wrong in believing that the money I put into a stock is tax-free and only the gain amount is taxed?

  • 9
    It's not wrong that only the money you gain is taxed. What's wrong is the idea that it's possible to pull out only the money you put in, without pulling out any of the gain.
    – BrenBarn
    Commented Sep 16, 2014 at 21:28
  • 1
    Tax questions require that you specify a country. Capital gains taxes are not treated the same everywhere. Voting to close until you clarify your jurisdiction. Commented Sep 17, 2014 at 1:10
  • @ChrisW.Rea Added 'united-states' Tag.
    – RBZ
    Commented Sep 17, 2014 at 13:28

2 Answers 2


You cannot get "your investment" out and "leave only the capital gains" until they become taxable at the long-term rate. When you sell some shares after holding them for less than a year, you have capital gains on which you will have to pay taxes at the short-term capital gains rate (that is, at the same rate as ordinary income).

As an example, if you bought 100 shares at $70 for a net investment of $7000, and sell 70 of them at $100 after five months to get your "initial investment back", you will have short-term capital gains of $30 per share on the 70 shares that you sold and so you have to pay tax on that $30x70=$2100. The other $4900 = $7000-$2100 is "tax-free" since it is just your purchase price of the 70 shares being returned to you. So after paying the tax on your short-term capital gains, you really don't have your "initial investment back"; you have something less. The capital gains on the 30 shares that you continue to hold will become (long-term capital gains) income to you only when you sell the shares after having held them for a full year or more: the gains on the shares sold after five months are taxable income in the year of sale.

  • 3
    +1. Although this question suggests he bought all the shares at once, it's worth noting that, if you bought shares over a period of time, you may be able to reduce your tax on a particular sale by selling particular lots for which there was a loss (or a smaller gain).
    – BrenBarn
    Commented Sep 16, 2014 at 21:27
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    I'm presuming your question presumes U.S. taxation (short- vs. long-term gains) but neither the question nor the OP's profile mention anything about the U.S. Your answer doesn't even mention your U.S. assumption, so the OP may have accepted it not knowing your tacit assumption. Commented Sep 17, 2014 at 1:11
  • @ChrisW.Rea From the question, one can infer that the jurisdiction the OP is asking about taxes long-term capital gains at a lower rate than it taxes short-term capital gains, and that the currency in that jurisdiction is called dollars. My answer is applicable to all such countries in general. About the only thing that is US-centric about my answer is that I said that the holding period for long-term gains is one year and that short-term capital gains are taxed at the same rate as ordinary income. Other countries might have different holding periods and different rates. Commented Sep 17, 2014 at 2:30
  • @ChrisW.Rea For example, Canada apparently does not distinguish between short-term and long-term capital gains, and it taxes capital gains at half the marginal tax rate. So, my answer is not applicable to Canada even though its currency is called dollars. Commented Sep 17, 2014 at 2:37
  • All I'm saying is we should be explicit in our assumptions, whether for the benefit of the OP or those who will come across this question later. BTW, similar to my comment at money.stackexchange.com/questions/27295/… Commented Sep 17, 2014 at 12:20

You didn't mention a country, and precise rules will be different from country to country. The usual rules are:

  1. Shares that you didn't sell don't count. If you buy shares, there is no taxable gain until you sell them.

  2. When you sell shares, it is assumed that the shares you are selling are the last ones that you bought.

  3. In many places, if you sell shares, and buy the same shares back very quickly, the tax office may have rules to pretend you never sold the shares. For example in the UK, where a good amount of profit per year is tax free, you can't just sell enough shares to stay below your tax limit and then buy them back to take profits out of the shares you own.

In your case, you made $30 profit on every share you sold, and that is what you will be taxed for in most countries. According to the rules of your country.

  • "When you sell shares, it is assumed that the shares you are selling are the last ones that you bought." Only if the LIFO principle applies. With the FIFO principle, the first ones you bought are considered sold.
    – glglgl
    Commented Feb 23, 2021 at 12:00

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