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The tax payable by individuals on the sale of stock differs depending on several factors. These include whether the stock is sold for a gain or loss, aggregate realized gains or losses of other capital assets in the seller's portfolio, the holding period of the stock, and the seller's marginal income tax bracket. All of these factors can have an impact on your tax bill.
Gain or Loss
Individual income taxpayers must first determine whether they have a gain or a loss on the sale of stock. No tax is due on stock that is sold for a loss, and the loss from the sale of stock can be used to offset gains on not only other other capital assets (including other stocks) but also other types of ordinary income, including wage and salary income. The gain or loss from the sale is computed by subtracting the cost of the stock from the selling price of the stock. (The taxpayer's basis may differ from cost if the stock was, for example, inherited by the taxpayer.) Taxpayers may then subtract from this result any costs associated with the sale of stock, such as brokerage commissions.
After determining the gain or loss from the stock, taxpayers must next determine their holding period. Tax rates and treatment differ depending on whether the stock has a long-term holding period or a short-term holding period. Any capital asset, which includes stocks, is considered to have a long-term holding period if it is owned for more than one year. Capital gains on stocks owned for one year or less are considered short-term gains.
Currently, the Internal Revenue Code provides that short-term gains from the sale of stock are taxed at ordinary income rates. Therefore, the rate of tax paid on short-term gains is equal to the marginal tax rate of the taxpayer, which increases as the taxpayer's level of taxable income increases. Gains on long-term capital stock gains, however, are eligible for reduced tax rates. Currently, taxpayers in the marginal ordinary income tax rate brackets of greater than 25 percent pay a 15 percent tax rate on long-term capital gains from the sale of stock Taxpayers in marginal ordinary income tax brackets of less than 25 percent pay no long-term capital gains tax.
The IRS does not allow taxpayers to pay reduced rates on long-term capital stock gains while using all stock losses to offset higher ordinary income. When calculating the amount of gain or loss, the Internal Revenue Code requires taxpayers to first aggregate the net gain or loss from the sale of all long-term capital assets, and then aggregate the net gain or loss from the sale of all short-term capital assets. The amount of the short-term capital loss must first be used to offset long-term capital gains before the taxpayer can claim the special, reduced long-term capital gain rates on any remaining long-term capital gain income. In addition only $3,000 in losses can be used to offset ordinary income or gains in any tax year. Anything in excess of $3,000 can be carried forward to offset losses in future tax periods.