Selling a stock for a profit pads your bank account, but also triggers tax reporting. However, your profits aren't just added to your ordinary income. Instead, since you're profiting from the sale of an investment, the Internal Revenue Service classifies the income as capital gains, which may be taxed differently than ordinary income.
To figure your capital gain, you have to first figure how much you paid for the stock and how much you received when you sold it. Your purchase price includes the value of each stock when you purchased it, plus any commissions you paid your broker. When you sell it, you get to reduce your proceeds by any commissions. For example, if you paid $1,000 for a stock plus a $10 commission and then sold the same stock for $1,100 and again paid a $10 commission, your taxable gain is $80.
How long you held the stock makes a big difference when determining how much you'll owe. If you hold the stock for more than one year, you qualify for long-term capital gains rates. When figuring the length of your holding period, don't include the day that you bought the stock, but do count the day that you sell it.
Long-Term Capital Gains
The tax code gives preferential treatment to long-term capital gains by offering lower tax rates. As of 2012 the maximum tax rate on capital gains is 15 percent. If your income puts you in the 25-percent tax bracket or lower, your long-term capital gains is taxed at 0 percent. As of 2012, the 25-percent tax bracket includes income from $70,700 to $142,700 for married couples filing jointly and $35,350 to $85,650 for singles. If you have a $10,000 capital gain, but you fall in the 25-percent tax bracket, you won't pay any taxes on the distribution.
Short-Term Capital Gains
Short-term capital gains count as ordinary income for tax purposes, which means you pay the same taxes on them as you would any other income. As of 2012, the ordinary income tax rates go as high as 35 percent, so if you've held the stock for close to year, it makes sense to hold it a few more days so your gains can be taxed at the lower long-term capital gains rates.
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."