Selling stock when you want to cash in on an investment or sell before the market dips in value is a key part of a timely investing strategy. However, there's much more to selling stock than pocketing the money you receive and walking away. You'll need to account for the money you get from selling stock and related expenses to comply with tax regulations and to track your investment portfolio.
One of the first things to account for when you sell stock is the cost basis of the shares you decide to sell. The cost basis refers to what it cost to acquire the stock. In most cases this is the original purchase price. If you sell only a portion of your shares in a company, you need to multiply the total cost basis for the stock by the portion you're selling now. For example, selling half of the shares you currently own in a company, when your total original cost for all of the shares was $1,000, gives you a cost basis of $500, since $1,000 times .5 equals $500.
Gains vs. Losses
Once you determine your cost basis for selling stock, you can subtract it from the amount you received from the sale. If the result is a positive number, you made a profit and will need to pay taxes on your capital gain. If your result is negative, you have a capital loss. Capital losses are still important since they can reduce capital gains from other investments when you claim them on a tax return. Capital gains taxes are set at a lower percentage than other income tax, but you must report accurate gains and losses to calculate your tax at the end of the year.
Expenses for Selling
Accounting for selling stock also requires you to calculate how much it cost to execute the sale. If you sell through a broker, you can deduct the amount you pay from your investment income. While this deduction may already be included in your capital gain total, you can also deduct other investment expenses, such as the costs of researching a stock sale and expenses traveling to and from your broker's or financial planner's office. This will reduce your income tax, but it is an allowable deduction only if you're prepared to prove that your investment expenses are legitimate.
Whenever you sell stock, it's important to keep accurate records. These records, which include account statements and federal tax forms issued by your stock broker, are useful for completing your taxes and will be among the things a tax professional needs if you choose to hire one. They also show how long you've owned the stock, which determines whether any profits from a sale will be taxed at short-term or long-term capital gains rates. They are also useful for your own records. Tracking your investments over time, including stock sales, will show you how well your investments are performing and how well you're managing your wealth overall.