About the only bad thing about making money on stocks is that you have to pay taxes on the profits. You only owe taxes on stocks sold during the tax year, and you don’t have to pay taxes on shares you still own at the end of the year. The Internal Revenue Service considers profit or loss on stock to be capital gains or losses. These gains or losses may be short-term or long-term. You must know the gain or loss of each transaction before you can determine the taxes on stocks.
Separate all your stock sales transactions into short-term and long-term investments. Short-term for tax purposes means the stock was held for less than one year. Stock held for a year or more is a long-term capital investment.
Calculate the cost basis for each stock sale separately. Add all transaction costs you incurred for the purchase and sale of the stock to the amount you paid for the shares themselves.
Subtract the cost basis from the total proceeds of the stock sale. If the cost basis is larger than the amount you sold the shares for, the answer will be a negative number, which means you took a loss on that particular investment.
“Net out” your long-term gains and losses. This just means adding all the capital gains together and then subtracting any capital losses. The result is your overall long-term capital gain or loss for the year. Follow the same procedure to net out your short-term stock gains and losses.
Offset capital gains with losses, if any. If you have a net long-term gain and a short-term loss, calculate taxable income by subtracting the loss from the gain. If you have a short-term gain and a long-term loss, you again subtract loss from gain. In cases where the loss is greater than the gain or you have both a net long-term and a short-term loss, you can use up to $3,000 in losses as a tax deduction to offset other income. However, you must use short-term losses first. Anything over $3,000 can be used as an offsetting tax deduction next year.
Determine the taxes on your net short-term gains. Short-term gains are taxed at your marginal tax rate. This means the percentage income tax you pay on stocks is the maximum tax you pay on other income. For example, if your marginal tax rate is 25 percent, you pay 25 percent of your net short-term gains.
Calculate income tax for long-term capital gains. Refer to your marginal tax rate. If the marginal rate is 15 percent or less, the long-term capital gains tax rate is zero, as of 2010. If your marginal income tax rate is more than 15 percent, your long-term capital gains tax rate is 15 percent.
Items you will need
- Stock transaction records