The Internal Revenue Service does not require you to report any income or allow you to deduct any losses on a stock you own until you sell it. When figuring your taxes on the sale of your stock, you need to know the purchase price of the shares, the sales price and the amount of broker fees paid on both the purchase and sale. Estimating your income taxes due on your stock sale helps you budget for your taxes, because your broker is not required to withhold money from the sale the way your employer is required to withhold money from your wages.
1. Add the broker fees paid on the purchase and sale of your stock to the price you paid for the stock to figure your basis in the stock. For example, if you purchased $10,000 of Stock A and paid a $30 commission on each transaction, your basis equals $10,060.
2. Subtract your basis from the amount for which you sold the stock. In this example, if you sold the stock for $13,060, subtract $10,060 from $13,060 to find you have a $3,000 gain.
3. Figure the amount of time that you held the stock. If you held it for more than one year, it qualifies for long-term capital gains rates. If you held it for one year or less, it is taxed as ordinary income. For this example, if you held the stock for three years, it would be taxed at the long-term capital gains rates.
4. Multiply the gain by your marginal income tax rate if it is ordinary income or your capital gains rate if it is a long-term capital gain. Your marginal tax rate equals the highest income tax bracket you fall into for the year. As of 2011, the capital gain rate on stocks equals 0 percent if you fall in the 15 percent tax bracket or lower and 15 percent if you fall in the 25 percent tax bracket or higher. In this example, if you fall in the 28 percent tax bracket, multiply $3,000 by 0.15 to find you owe $450.
- In most cases, your broker or financial institution can provide you with a record of your purchases and sales of shares in the event that you lost (or did not keep) your records. These records should also include any commissions you paid on the transactions so that you have the required information for filing your taxes.
- If you purchased additional shares of the company through a dividend reinvestment program, the amount of dividends you reinvested add to your basis in the stock.
- Going forward, keep records of the date you purchased the stock and the price you paid per share so that you can figure your potential gain or loss and whether that gain or loss will be taxed at ordinary or capital gains tax rates before you sell your shares.
- Smart Money: Calculating Tax on Stock Sales
- Internal Revenue Service: Publication 550
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