When you sell shares of stock, you have to calculate your gain on the sale for tax purposes. Sometimes, you may be selling shares that you purchased at separate times. If you kept records of your shares, specified to your broker which shares you wanted to sell and received written confirmation from your broker that those specific shares were sold, you use the basis for those specific shares. If you did not specify certain shares, which is uncommon, the IRS assumes that you sold the oldest shares first.
Determine the shares you sold using the first-in-first-out (FIFO) method by selecting the oldest shares. For example, if you purchased 100 shares at $50 per share two years ago and another 100 shares at $55 per share six months ago, and then you sold 150 shares, you would assume you sold the 100 shares purchased two years ago and 50 of the shares purchased six months ago.
Calculate your gain on each subset of shares by subtracting the price you paid for the stock from the price for which you sold the stock and multiplying the result by the number of shares. In this example, if you sold the shares for $65, subtract $50 from $65 to get a gain of $15 per share and multiply $15 by 100 to get a gain of $1,500. For the shares purchased six months ago, subtract $55 from $65 to get $10 and multiply $10 by 50 to get a gain of $500.
Classify your gains as either long-term capital gains or short-term capital gains based on the length of time you held the shares. The sale of shares held for one year or less results in a short-term capital gain, which is taxed as ordinary income. The sale of shares held for longer than one year result in a long-term capital gain, which is taxed at the lower capital gains rate. In this example, the $1,500 profit from the shares held for two years would be taxed at the lower capital gains rate while the $500 profit from the shares held for six months would be taxed as ordinary income.
- Keep records of your stock purchases and sales. If you misplace your records, your financial institution or broker should be able to provide replacement information.
- You have the burden of proving that you requested specific shares be sold and that your broker gave you written confirmation that those specific shares were sold if you elect not to use the FIFO method.
- Creatas/Creatas/Getty Images