The Internal Revenue Service considers profit derived from the transfer of ownership of corporate stock to be taxable income that is subject to certain deductions. How much tax you pay, if any, depends on the circumstances of the transfer, including the amount of your profit and how long you held the stock. If you don’t make a profit, you don’t have to pay any tax on the transaction.
Capital Gains Tax vs. Ordinary Income Tax
If you owned your stock for no more than a year before you sold it, ordinary income tax rates apply to your profits. However, if you owned your stock for more than a year before you sold it, favorable capital gains tax rates apply. As of 2012, the capital gains tax rate was 15 percent for most taxpayers and zero for taxpayers in the lowest tax bracket. The capital gains tax rate is set to increase to 20 percent for all taxpayers in 2013.
Figuring Your Profit
The IRS applies strict rules to the calculation of your profit from the sale of stock. If you originally purchased the stock, the general rule is that your profit equals the sale price minus your “adjusted basis.” Adjusted basis represents your cost basis -- your purchase price -- plus any related expenses such as brokers' commissions. If you didn’t purchase your stock in the first place, your cost basis is either the fair market value of your stock at the time you obtained it or the previous owner’s cost basis.
Aggregating Your Transactions
You pay capital gains tax only on net capital gains that you enjoy during the tax year. For example, if you made of profit of $60,000 on the sale of stock but lost $140,000 selling commercial real estate, you have incurred a net capital loss of $80,000 and won’t have to pay capital gains tax as long as those two transactions were your only transactions during the tax year.
Deducting Your Losses
Even if you owe capital gains tax, you can reduce the amount you owe by subtracting deductible capital losses. You can deduct capital losses only from losses on the sale of investment property, such as commercial real estate, rather than property held for personal use, such as your home. If you sell stock for a profit but incur a net capital loss for the year, you can even carry forward up to $3,000 in excess capital losses and deduct them from any capital gains you may enjoy next year.
Filing Your Return
Report capital gains and losses on IRS Form 1040, Form 8949 and Schedule D. Depending on the details of your transaction, you might not have to complete both Form 8949 and Schedule D. For example, if your only capital gain or loss for the year was profit from the sale of stock that was derived from your participation in a business partnership, you don't need to file Form 8949
- USA Today: How to Figure Your Capital Gains Taxes on Stock Sales
- Internal Revenue Service: Instructions for Schedule D (and Form 8949
- Internal Revenue Service: Ten Important Facts About Capital Gains and Losses
- Internal Revenue Service: Investment Income and Expenses
- Internal Revenue Service: Basis of Assets
- The Street: Time to Avoid 2013 Capital Gains Hike Is Now
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.