Whether you're a day trader or are selling shares you've held for years, it feels great to make a profit when you sell your stock. However, you won't be the only one enjoying the proceeds, because the Internal Revenue Service counts the profits as taxable income. To figure out how much you have to share with Uncle Sam, you have to know how much of your stock proceeds are taxable profits.
The selling price of your stock isn't necessarily the amount that you're going to use when figuring your gain or loss. Instead, the IRS understands that it costs money to trade, so you're allowed to exclude the portion of your proceeds when figuring your net proceeds from the sale. For example, say you sell your stock for $5,025, but you pay a $25 fee on the trade. Your net proceeds are only $5,000.
Typically, your basis for the stock is the price you paid to acquire it, including transaction fees. For example, say you buy stock for $4,675, but you also pay a $25 fee: Your basis is $4,700. If you receive the stock as an inheritance, your basis equals the fair market value of the stock on the date the decedent died. For example, if you receive stock as an inheritance that was worth $4,700 when the decedent died, that's your basis regardless of whether the decedent's basis was $4,000 or $6,000.
To figure your taxable gain, subtract your basis from your net proceeds. For example, your net proceeds are $5,000 and your basis is $4,700, subtracting $4,700 from $5,000 gives you a taxable gain of $300. Alternatively, if the values were switched and your basis was $5,000 and your net profits were only $4,700, you would have a $300 loss instead.
The tax rate applied to the gains from your stock sales depends on how long you owned the stock before you sold it. If you held it for a year or less, the gains are taxed at your ordinary income tax rates, just like your salary. But, if you hold it for more than one year, it gets taxed at the lower capital gains rate. Regardless of which rate applies, your investment income is hit with an extra 3.8 percent tax if your modified adjusted gross income exceeds the annual limits. As of 2013, the net investment income tax applies if your MAGI exceeds $250,000 if you're married filing jointly or $200,000 if you're single.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."