Tax Implications of Stock Gains

by Michael Evans

The Internal Revenue Service (IRS) requires you to pay capital gains taxes when you make a profit off the sale of capital assets, such as stocks. If you live in a state that requires you to pay a state income tax, you may face additional taxation on stock gains. The amount of tax you must pay, if any, can depend on how long you own the stock, your total income and the total earnings you receive from your stock investment.

Capital Gains

The IRS requires you to report and pay taxes on earnings from capital assets. Capital assets can include your home and its furnishings, or investment instruments, such as stocks and bonds. Depending on where you live, your state may also require you to report and pay taxes on capital gains.


To determine capital gains earnings, you must know the basis of your stock holdings. The basis typically means the price at which you purchase a share of stocks. You do not have to pay taxes on the basis of your stocks, only earnings that exceed the basis. For example, if you purchase a share of stock for $50, the basis of the share is $50. If you sell the same share for $65, you must report a capital gain of $15.

Long-Term vs. Short-Term Gains

The IRS categorizes capital gains as short-term or long-term based on how long you own them. If you sell a share of stock after holding it for a year or less, the IRS considers your earnings a short-term gain. Earnings from shares of stocks you have owned more than one year are considered long-term gains. You typically must pay higher taxes on short-term capital gains, compared to long-term gains. You may also face different tax rates on long-term and short-term gains in states that require you to file an income tax return.

Net Capital Gains

Net capital gains from stocks may also have an impact on your tax liability. Net capital gains are long-term earnings on a share of stock that exceed long-term losses on the same share. The IRS typically taxes net capital gains at a lower rate than other types of investment income.

Tax Rates

Federal capital gains tax rates vary, and can depend on the category of your stock earnings, such as net, long-term or short-term gains. Most long-term capital gains are taxed at a rate of 15 percent. However, a short-term capital gain is taxed at the same rate as your personal income tax rate. The rate of capital gains tax you must pay on a state level, if any, can vary depending on where you live.

Capital Losses

If you incur higher losses than gains on your stock investments, you can use the loss to reduce your income on your federal taxes. As of August 2011, the IRS allows you to write off up to $3,000 in capital losses, depending on you tax filing status. If you have losses that exceed the amount the IRS allows you to report, you can carry over the additional losses to the future filing years. The amount of capital losses you can report on a state tax return may vary from state to state.

About the Author

Michael Evans was born in Memphis, Tenn. He graduated from The University of Memphis, earning a Bachelor of Arts degree in communication. His primary course of study was photography and film production. He first began writing professionally for iOwn Inc. in 1997, and was published by LensWork Magazine in 2003.

Photo Credits

  • Comstock/Comstock/Getty Images