Capital gains is the amount your stock has appreciated over the initial price you paid for it. If you choose to hold the stock, then it is considered an unrealized capital gain, which has no tax implications. Realized capital gains occur when you actually sell the stock. The amount of tax you pay on a capital gain depends on your holding period and tax bracket.
To qualify for a lower tax rate, you must hold a stock for more than one year before selling it. The tax rate for long-term capital gains is 5 or 15 percent depending on your tax bracket. Your capital gains are taxed at 5 percent if you fall within the 15 percent or lower tax bracket, and 15 percent if your tax bracket is 25 percent or more.
A short-term capital gain is one that is realized within a year. The IRS considers a short-term capital gain as ordinary income. Therefore, if you sell your stock for a gain within the year, you will be taxed at an ordinary income rate of 25 percent or higher. If you sell your stock on the one-year anniversary of purchase, it is still considered a short-term gain subject to ordinary income tax.
It is important that you maintain accurate records of all your stock purchases. Creating a spreadsheet helps. You need to know how much you paid for each stock investment. This includes buying and selling price, date purchased and sold, brokerage fees and commissions paid. If possible, look to defer selling stocks until you are eligible for lower tax rates on capital gains. For tax reporting purposes, your stock market gains and losses are reported on Schedule D, then transferred to Line 13 of your 1040 form.
You can offset some of your taxable capital gains tax by reporting realized losses. The IRS allows you to deduct a maximum of $3,000 a year on realized losses, and $1,500 if you are married filing jointly. Defer your losses in good years or when it is most advantageous to offset the capital gains.