For tax purposes, you have a capital gain or loss only when you sell shares. How much you pay in taxes on sold shares will vary depending on how long you owned the shares as well as on the size of your capital gain. If you lost money on the stock investment, you may use the loss as a tax deduction on your tax return.
The sale of stock results in a capital gain or loss that is either short-term or long-term. If you owned the sold shares for one year or less, the gain is short-term and is taxed at the same rate as ordinary income, like your salary. Gains on stock held for more than one year are long-term and qualify for capital-gains tax rates. As of 2012 the maximum long-term capital gains rate was 15 percent. The 15 percent rate was set to expire at the end of 2012, so check with the Internal Revenue Service about current rates.
The tax basis or cost basis of your stock investment is the price you paid for the shares plus broker’s commissions and fees. To determine the size of your gain from selling stock, subtract sales commissions and fees from the proceeds of the sale. Then subtract the tax basis. The result is your capital gain. If the answer is a negative number, you have a loss instead of a gain.
Report capital gains and losses on your tax return using IRS Form 1040, Schedule D. If you have only one stock transaction to report, this is pretty simple. If you have multiple gains and losses it’s more complicated. Add up all of your long-term gains and subtract all long-term losses. The result is your net long-term capital gain for the year, which you multiply by the long-term capital gains tax rate to calculate the tax you owe.
For short-term transactions you use the same procedure, but multiply the result by the highest tax rate that applies to your other income. If you have either net long-term or short-term losses, these may be used to offset other income.
Investors often buy shares of stock in increments over a period of time and sell part of the investment. In this situation, some shares have a different cost basis and capital gain. The IRS assumes that you first sell the shares you’ve owned the longest. With a partial sale, that might not be to your advantage. For example, you might want to sell only recently purchased shares that have a smaller capital gain so that you will owe less tax. Tell your broker which shares you want to sell, and ask for written confirmation for your tax records.