Tax Treatment of Stocks

by Dan Keen

With computer technology, the Internet and a host of online discount brokerages, anyone can quickly and easily buy and sell shares of stock from his home computer. Such transactions can, of course, result in a loss or a profit. In either case, when a stock is sold there are tax implications that must be recorded for filing with your annual personal income tax return.

Reporting the Sale of Stocks

You do not pay tax on the shares of stock you own until you sell them. Form 1040 Schedule D, "Capital Gains and Losses," is used to report income and losses for stock transactions. Six columns are given on the form to report a transaction: a description (100 shares of XYZ), the date you purchased the shares, the date you sold the shares, the price you received for selling the shares, the price (cost) you paid to buy the shares and the gain or loss from the transaction (subtract the cost from the price received for selling the shares). Space is provided for recording up to five transactions. If you've made more transactions than that, fill out and attach Schedule D-1, which has additional space.

Short-Term and Long-Term Capital Gains/Losses

Schedule D has two sections, or parts, where stock transactions are reported. Both are similar, except that Part I is where you list stock sales that you held for less than one year, and Part II is for stock sales that you held for more than one year. These are called short-term and long-term capital gains (or losses).

Reporting Options Trades

"Call" and "put" options transactions are also reported on Schedule D. Again, use Part I for short-term transactions and Part II for long-term transactions. Unlike stocks, options contracts have expiration dates. When an options contract is not exercised, its value becomes completely worthless once the expiration date has passed. The Internal Revenue Service treats worthless options as though they were sold for zero dollars on their expiration date, and therefore, are reported as a loss.

Reporting Dividends

Many large corporations share their profits with their stockholders by periodically issuing dividends. A "ex-dividend" date is set in which anyone owning shares of stock in the company on that date qualifies to receive a dividend, even if they sell all their shares the very next day. The amount of dividend you will receive depends on the number of shares of stock you own and the amount per share the company is paying. At the end of the year, the company will send you a Form 1099-DIV. The amount shown in box 1a is the amount of ordinary dividends paid to you. Report this figure on your IRS Form 1040 Line 9a. If the total is over $1,500 you must also fill in and attach Schedule B, "Interest and Ordinary Dividends."

About the Author

Dan Keen is the publisher and editor of a county newspaper in New Jersey. For over 30 years he has written books and magazine articles for such publishers as McGraw-Hill. Keen holds a degree in electronics, was chief engineer for two radio stations and taught computer science at Stockton State College.