Capital Gain Rules When Selling & Reinvesting Stock

When you sell stock at a price higher than you purchased it, you will incur a capital gain. Depending upon the timing involved in the buying and selling of the shares, you may be eligible to use a special lower tax rate on the money you made. Use Form 1040, Schedule D to report these gains and to help you determine if they qualify for the lower capital gains rate.

Short-Term Capital Gain

When completing Schedule D, you will be asked for the date of purchase of your stocks and for the date of sale. If you held the stocks for less than one year, the capital gain is considered short term and you will pay ordinary income tax rates. If you have short-term capital loss, you may subtract the loss from the gain and the balance will be taxed as ordinary income.

Long-Term Capital Gain

If your entries on Schedule D determine that you held the stock for longer than one year, the capital gains qualify for the lower capital gains rate which, for 2012, is a maximum of 15 percent. If you had a long-term capital loss, you may subtract the loss from the gain, paying 15 percent on the balance.

Dividend Reinvestment

Selling stock that was purchased through a dividend reinvestment plan can be a little more complicated. You may have made your original purchase more than a year ago, but because you are reinvesting, for example, quarterly dividends, you may have some shares purchased within the past 12 months when you decide to sell. Keep good records so you can document what part of your gain is short-term and how much is long-term.

Reinvesting

If you had a capital gain, there are no special rules about future investments. You may buy new shares of the same company or invest in a totally different company. Only if you had a capital loss would you need to be concerned with the wash sale rule that defines the timing between selling and then reinvesting in shares of the same company or another company in the same industry.

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