Investing in the stock market is one way to put your money to work for you so that it can grow even when you're asleep. However, when you are selling shares of a stock, you have to share the news – and a portion of your profits – with Uncle Sam when you file your taxes. Filing taxes with stock profits can be daunting, but knowing the rules helps you time your sales to have a minimal negative effect on your taxes.
Claiming Your Gains
Your gains and losses get divvied up into two categories: long-term and short-term. The difference is how long you held the stock. If you held it for a year or less, it's a short-term gain and is taxed at your ordinary income tax rates. But, if you held it for over a year, it counts as a long-term capital gain. Your long-term gains are taxed at a lower rate than ordinary income. For 2018, the highest long-term capital gains rate is 20 percent, but that only applies if you're in the 37 percent tax bracket. Lower tax brackets have lower rates for capital gains. For example, if you're in the 10 percent or 12 percent bracket, you won't pay any taxes on your long-term capital gains.
To figure your gains or losses after selling your stock (even if you are selling stock without a broker), you need to know your basis and your net proceeds. Your basis usually equals what you paid for the shares plus any costs of acquiring them, such as commissions. If you received your shares as a gift, you use the basis of the person who gave you the shares. But, if you inherit the shares, your basis is the fair market value of the shares on the date you received them. Your net proceeds equal the selling price of the stock minus whatever you paid to sell them. Your taxable gain equals your net proceeds minus your basis. If it's a negative value after selling shares of stock, you have a loss that you can use to offset other gains.
Other Stock Sale Effects
Your stock sale gains might be tax-free, but they could still cost you on your tax return. Some tax breaks have limits on how high your adjusted gross income can be before you lose the ability to claim them. For example, the lifetime learning credit starts to phase out if you're single and your modified AGI exceeds $56,000. When you hit $66,000, you can't claim it at all. If your income is $58,000 for the year, and then you make an additional $12,000 from selling shares of stock (even through private sale of stock), you won't be eligible for the lifetime learning credit anymore.
Extra Tax Paperwork
Even if you won't owe any taxes, you still have to report all your stock sales on your tax return. You must file separate Form 8949s for your long-term gains and your short-term gains and then transfer your totals over to Schedule D to figure your net capital gains for the year. It also means that you have to file your taxes with Form 1040 to file your return – which could mean extra fees from your tax preparer.
- Internal Reveue Service: Publication 550 -- Investment Income and Expenses
- Internal Reveue Service: Topic 409 -- Capital Gains and Losses
- Wall Street Journal: High Earners Facing First Major Tax Increase in Years
- Internal Revenue Service: Topic 352 - Which Form – 1040, 1040A or 1040EZ?
- Internal Reveue Service: Publication 970 -- Tax Breaks for Education
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."