Are Individual Stock Market Gains Taxable?

Different investment gains have different tax implications.

Different investment gains have different tax implications.

Putting your money to work in the stock market can generate much higher returns than leaving it in a savings account that pays minimal interest. Any money that you make is taxable income. However, you don't have to include it on your tax returns until you actually sell the stock and realize the income. If your stock just increases in value but you don't sell, you don't have any taxable gains.

Calculating Your Taxable Gain

To figure your gain, you need to subtract your adjusted basis from the amount you realized on the sale. Your adjusted basis equals the price you paid for the stock plus any additional fees, such as trade fees or commissions. The amount you realized on the sale of the stock equals the selling price minus any fees. For example, assume you bought $3,000 worth of stock and you paid a $50 commission. Your adjusted basis is $3,050. If you later sell the stock for $4,000 and pay a $50 commission, your amount realized is $3,950. Therefore, your taxable gain is $900.

Long-Term Versus Short-Term

The time you hold the stock makes a big difference in the resulting taxes you owe. If you hold the stock for one year or less, the gain is a short-term capital gain, which is taxed at ordinary income tax rates. If you hold the stock for more than a year, it's a long-term capital gain, which is taxed at lower rates. As of 2012, the long-term capital gains rates do not exceed 15 percent.

Offsetting Gains with Losses

If your losses for any year exceed your gains, you wipe out all of your gains and can deduct up to $3,000 more in losses. Any losses beyond that amount must be carried over to future years. For example, assume you have $8,000 in gains but $15,000 in losses in year one, plus $5,000 in gains in year two. In year one, you would report a $3,000 loss and carry over the remaining $4,000 loss into year two. In year two, the $4,000 carryover offsets most of the gain, so you only have $1,000 of taxable gains.

Dividend Treatment

If you receive dividends, you're also going to have to report that income on your taxes. You'll receive a Form 1099-DIV that shows how much you received and how much you have to report on your taxes. Some companies offer a dividend reinvestment program, commonly called a DRIP, which allows you to automatically use your dividend payment to buy more stock. Even if you participate, your dividends are still taxable. However, you should keep track of the amount you reinvest because that is your cost basis for the new shares.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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