When you sell shares of stock or other capital assets, you almost always end up with a gain or loss. The Internal Revenue Service insists that you report capital gains and pay taxes on them. You may use capital losses to offset capital gains or other income within IRS limits. Long-term capital gains, meaning gains from assets you own for more than one year, are usually taxed at lower rates than ordinary income. That makes knowing how to calculate taxes on sold shares especially important. Using the right approach can save money on taxes.
Determine the shares you wish to sell if you are only liquidating part of your holdings in a stock. If you have purchased shares at different times, some may qualify for long-term capital gains tax rates, while recent purchases may not. Also, shares bought at different prices will have different gains or losses. Picking the right shares to sell can reduce your taxes. By default, the IRS assumes the first shares you sell were purchased first. However, you can specify which shares to sell. Consult your broker if you aren’t sure which shares are which within your stock holdings.
Calculate your cost basis. Cost basis is your total investment in the shares. Include the price paid for the shares and all broker’s commissions and fees you paid to buy and sell the shares.
Subtract the cost basis from the
sale proceeds for the sold shares. If the cost basis is less than the sale proceeds, you have a capital gain. If the cost basis exceeds the sale proceeds, you’ll get a negative answer and you have a capital loss. If you owned the shares for more than one year, you have a capital gain or loss. If you owned the shares one year or less, the gain or loss is short-term.
Add your long-term gains for the sold shares to long-term gains from other transactions. Do the same for short-term gains, long-term losses and short-term losses. Use short or long-term losses first to offset gains of the same type and then to offset losses of the other. For example, use long-term losses to offset long-term gains. If you have long-term losses left over, you can use them to offset short-term gains or other income, up to $3,000. Net capital losses in excess of $3,000 may be used in future years to offset income.
Multiply net long-term capital gain by the applicable tax rate. Usually this is 15 percent, but check with the IRS for your current applicable tax rate. Multiply net short-term capital gains by the marginal, or highest, tax rate that applies to you. The results are the amounts of taxes you owe on long- and short-term capital gains, including your sold shares.
Report your capital gains and losses using IRS Form 1040, Schedule D, “Capital Gains and Losses.”