Stock represents ownership in a company, and each share of stock has identical value. Even so, not all shares of stock you own are considered equal for tax purposes. Such factors as when you acquired your stock, how you acquired your stock and which shares of stock you sell affect how the Internal Revenue Service treats your profits or losses on stock sales. If you buy a number of shares of stock, then sell some but not all of those shares, you must prorate your costs to determine your cost basis for tax purposes.
Items you will need
- Records of stock transactions
Determine your per-share cost basis. This can vary based on how you acquired your stock. If you purchased the stock on your own behalf, the cost basis is the price you paid for the stock plus any costs associated with making the purchase, such as transfer and recording fees and commissions you paid your investments broker. If you received the stock as a gift, your cost basis is the lower of the giver's cost basis or the stock's current market value. If you inherited the stock, your basis is the stock's current market value. Divide the total cost basis of your stock by the number of shares of stock. The result is your per-share cost basis.
Determine your per-share gain or loss. Subtract any costs associated with the stock sale, such as any commissions you paid to your investments broker, from the total sales price you received for the stock sale. Divide this amount by the number of shares you sold. The result is your per-share sales price. Subtract your per-share cost basis from your per-share sales price. If the result is a positive number, you have a profit, also known as a capital gain. If the result is a negative number, you have a loss, also known as a capital loss.
Figure your gain or loss on IRS Form 8949 Sales and Other Dispositions of Capital Assets, then transfer the results to Schedule D, IRS Form 1040. Form 8949 includes sections for short-term and long-term capital gains or losses. If you owned your stocks for one year or less, the IRS considers the sale to be short-term. If you owned your stocks for more than one year, the IRS considers the sale to be long-term. Short-term gains are taxed at your ordinary income tax rate, while long-term gains are taxed at the more advantageous long-term capital gains rate.
- Keep track of your costs as you accumulate your stock. If you acquire additional shares of the same company at a later date, you have the option of designating which shares you want to sell. For example, if the stock price rises and you wish to sell some of your stock to lock in the gain, you might want to sell the oldest shares to benefit from the more advantageous long-term capital gains rate.
- Certain situations, such as stock splits and stock dividends, can impact the cost basis of your stock.
- Internal Revenue Service: Publication 550, Stocks and Bonds
- USA Today: Look to Your Tax Situation When Deciding Which Shares to Sell
- Internal Revenue Service: Schedule D Sales and Other Dispositions of Capital Assets
- Internal Revenue Service: Instructions for Schedule D
- Internal Revenue Service: Form 8949 Sales and Other Dispositions of Capital Assets
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