When you sell a stock, you may have to pay taxes on the profits you made. The Internal Revenue Service (IRS) has very specific rules about how to calculate your gains and losses. In this article, we will explain how to figure out your taxable income from selling stocks, as well as some tips to help minimize your tax bill. Let’s get started!
Purchase vs. Sale Price
The first thing you need to know to calculate your gains and losses is the difference between your purchase price and your sale price. Your purchase price is the amount you paid for the stock when you bought it. Your sale price is the amount you received when you sold it. The difference between these two prices is called your capital gain or loss.
If your sale price is higher than your purchase price, then you have a capital gain. For example, let’s say you bought shares of XYZ Company for $100 per share. Later, you sell those same shares for $150 per share. In this case, your capital gain would be $50 per share ($150 – $100).
Conversely, if your sale price is lower than your purchase price, then you have a capital loss. Using the same example, if you sold your shares of XYZ Company for $50 per share, then your capital loss would be $50 per share ($100 – $50).
Short-Term vs. Long-Term Gains and Losses
The next thing you need to know is the difference between short-term and long-term gains and losses. Short-term gains and losses are those that occur when you sell a stock that you have owned for one year or less. Long-term gains and losses are those that occur when you sell a stock that you have owned for more than one year.
Generally speaking, short-term gains are taxed at your ordinary income tax rate, which is the rate you pay on other types of income, such as wages from your job. Long-term gains are taxed at a lower rate, which is currently 15% for most taxpayers. There are a few exceptions to this rule, so it’s important to check with a tax professional before assuming that your gains will be taxed at the 15% rate.
Figuring Out Your Cost Basis
Your cost basis is the starting point for figuring out your capital gain or loss. In other words, it’s the original value of your investment, plus any additional money you’ve put into it. For example, if you bought shares of XYZ Company for $100 per share and later invested an additional $50 in the company, your cost basis would be $150 per share.
There are a few different ways to calculate your cost basis, and the method you use will depend on how you acquired the stock. For example, if you bought the stock outright, then your cost basis is simply the purchase price. But if you inherited the stock or received it as a gift, then your cost basis is usually the fair market value of the stock on the date it was given to you.
Again, it’s important to check with a tax professional to make sure you’re using the correct method for calculating your cost basis.
Determining Your Capital Gain or Loss
Once you know your cost basis and sale price, you can figure out your capital gain or loss. As we mentioned earlier, your capital gain or loss is simply the difference between your sale price and cost basis. If your sale price is higher than your cost basis, then you have a capital gain. If your sale price is lower than your cost basis, then you have a capital loss.
For example, let’s say you bought shares of XYZ Company for $100 per share and later sold those shares for $150 per share. In this case, your capital gain would be $50 per share ($150 – $100).
On the other hand, let’s say you bought shares of XYZ Company for $100 per share and later sold those shares for $50 per share. In this case, your capital loss would be $50 per share ($100 – $50).
