Deductibility of Transaction Fees When Selling Stock

by Vicki A. Benge

According to the Internal Revenue Service, most personal and investment property is considered a capital asset. Shares of stock in public companies are considered capital assets under IRS rules. When selling stock, reducing the capital gain that must be reported on federal tax returns reduces the amount of taxes due on the sale. Transaction fees in the form of sales commissions or transfer charges should be included when figuring the sales price and basis of the asset to reduce the capital gain reported.

Knowing the Cost Basis

As it pertains to federal income taxation, investors can deduct the cost of transaction fees when buying and selling stock by adding the cost to the basis of the stock. What this means is that you cannot directly deduct the amounts on federal income tax returns, but you can use the amount to figure your cost basis in determining capital gains or losses. Remember to include the costs of fees and commissions you paid to acquire the stock as part of your original basis. For example, suppose you buy shares at $10 each and the commission on each share is $0.05. The original cost basis per share would then be $10.05.

During Ownership

The IRS reminds taxpayers that particular changes to the basis of stock may occur during ownership. For example, receiving stock splits or nontaxable dividends before selling the shares reduces the original cost basis. Be sure to subtract the value of these changes from your original costs during computation of the basis of the asset.

Classifying Assets

Under IRS regulations, capital gains and losses are considered either short-term or long-term. Basically, any asset you own for one year or less is categorized as short-term. If you own the asset more than one year, the IRS considers it a long-term investment. According to IRS rules, the count begins on the day after you purchase the asset and ends the day you relinquish ownership. When you sell a capital asset, such as shares of stock, if you receive more than you paid for the asset, you earn a capital gain. If you receive less than you paid for the asset, you experience a capital loss. Transaction fees for selling stock held for both the short-term and long-term are included when figuring capital gains and losses.

Reporting Sales

Capital gains and losses from stock sales are generally reported to the IRS on Schedule D of Form 1040. Short-term and long-term transactions are separated on the form. You report both the sales price and the cost basis to determine gains or losses for each transaction. It is through this method of figuring and reporting basis and sales that transaction fees paid when selling stocks are accounted for by deducting the amounts from the gross sales price and reporting net sales or adding the sales charges to the cost basis. Although the fees are not directly deductible, the costs incurred reduce the reported capital gains.

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