Tax Treatment of Stocks

Managing your stock sales can reduce your taxes.

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When you sell stocks you pay taxes on the gains, and you get to deduct the losses. How much you pay or write off depends on how long you have held the stocks. You divide your stock sales into long-term and short-term investments to list them in the proper categories on your tax return and take advantage of the lower tax rate on long-term sales.

Long-Term Gains

When you hold a stock for more than one year, it qualifies as a long-term stock. If you sell a long-term stock for a profit, that profit counts as a capital gain. Tax on capital gains runs lower than tax on ordinary income. As of 2012, the capital gains rate was 15 percent for anyone in the 25 percent income tax bracket or above. If you are in the 10 percent or 15 percent tax bracket, the capital gains tax is zero.

Long-Term Losses

If you lose money when you sell a long-term stock, this is called a capital loss. For example, if you made $1,000 on one long-term stock and lost $500 on another long-term stock, you could subtract the capital loss from the capital gain and pay tax on only $500 of profit.

Short-Term Gains

If you hold a stock for one year or less, you have a short-term stock. Selling short-term stocks for profit means you must count the money as ordinary income. You pay income tax on the gain at the same rate you pay for wages.

Short-Term Losses

If you have a short-term loss, you can write off that loss either against your short-term gains or against your other ordinary income. For example, if you make $4,000 on one short-term stock and lose $1,000 on another short-term stock, you can subtract the loss from the gain and pay taxes on only $3,000.

No Gains

If your stocks have only losses and no gains, you can apply the losses to your taxable income. You can write off up to $3,000 per year in losses this way. If you have more than $3,000 in losses, you can carry $3,000 of the remainder forward to the next year and use it to write off against capital gains then. You can carry the loss forward for consecutive years until you use it all up. Note that if you carry forward a long-term loss to the next year, you should write it off against long-term gains. For short-term losses that you carry forward, write them off against short-term gains.