Every time you sell stock, you rack up a gain or loss that affects your federal income tax. When you add up all your stock gains and losses, you end up with your net gain or loss for both short-term (held for less than one year) and long-term holdings (held for one year or more). These net gains or losses, better known as capital gains or losses, are taxed depending upon how long you held the capital asset before selling it.
You must report all stock sales when filing your income taxes. However, you don't have to report stock sales that occur in a qualified retirement account like an IRA or 401(k).
Minimum Capital Gains To Report
The capital gains reporting threshold is simple to understand, in that you must report all capital sales no matter how small the gain or loss. Capital investments includes things such as stocks, bonds and other assets like real estate.
Your broker will send you a copy of IRS Form 1099-B for each stock sale. The form identifies the stock, the date and cost for the purchase in addition to the date and proceeds from the sale. The form will also indicate whether the holding period was short or long term with the former being assets held for less than a year and the latter being those held for more than a year.
Capital Gains Reporting Process
When filing your taxes, you gather all your 1099-B forms for the year, divide them between short- and long-term holding periods and enter the information onto the capital gains tax form, IRS Form 8949.
You’ll end up with net amounts for short- and long-term capital gains/losses, which you transfer to Schedule D of Form 1040. These net amounts determine the amount of capital gains tax you’ll have to pay for the year.
If you have a capital loss, you can apply up to $3,000 of the loss to reduce ordinary income. Any excess capital losses can be carried forward and applied to reduce your ordinary income in future years.
Exceptions to the Rule
You must report all sales of capital assets, except those within a qualified retirement account such as a 401(k). A special rule applies if the asset is a collectible, such as precious metals, jewelry, antiques and art. The 1099-B has a checkbox that identifies the asset as a collectible. The long-term capital gains tax on profits from the sale of collectibles is fixed at 28 percent, higher than the long-term capital gains tax on financial assets like stock.
2019 Tax Law
Short-term capital gains are taxed at the same rate as ordinary income. However, the tax rates on long-term capital gains are reduced and depend on your filing status as well as how much you've earned for the year. For example, if your income is no greater than $39,375, your long-term capital gains rate is 0 percent. Incomes from $39,376 to $434,550 will generate a 15 percent long-term capital gains rate, while higher incomes trigger the maximum rate of 20 percent.
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