Tax Treatment of Stock Sales

Stock sales result in taxable gains and losses.

Stock sales can result in profits or losses on the stock market investments. Stock market profits realized from the sale of stocks are considered taxable income and taxes must be paid. However, stock losses are tax deductible and can be used to offset tax gains. The IRS has a specific set of rules on how to account for gains and losses from stock sales.

Identification

Gains and losses from the sale of stock are called capital gains and losses for tax purposes. The IRS has separate rules for declaring and taxing capital gains. Capital gains and losses are divided into long term and short term categories. Long-term gains and losses are from the sale of stock owned longer than one year. Short-term gains and losses are from stocks owned for a year or less.

Benefits

The tax rate for long-term capital gains is lower than a taxpayer's regular tax rate. The maximum tax rate for long term gains is 15 percent and will be 0 percent for investors in lower regular income tax brackets. Short-term capital gains are taxed at an investor's regular income tax rate.

Considerations

Capital losses can be used to offset capital gains and reduce the taxable income from the gains. Like losses are used first to offset like gains. Long-term capital losses are used to reduce long-term capital gains, and short-term capital losses are used to reduce short-term capital gains. Excess losses of one type can then be used to offset losses of the other category of gain. If the total losses from stock sales exceed the total gains, up to $3,000 of capital losses can be used to reduce other income for tax purposes.

Significance

Investors should consider the tax consequences of the timing of stock sales. Long-term capital gains are more desirable because they result in a lower tax break. Capital losses are better used against short-term capital gains or other income. Investors should keep track of their gains and losses from stock sales through the year and understand the tax consequences of any sale.

Warning

An investor cannot sell a stock to take a loss for tax purposes and then buy it or a similar investment right back. This is called a wash sale and the IRS will disallow the loss as a tax deduction. An investor cannot buy back the same stock within 60 days if she wants to use a loss as a tax deduction. There is no wash sale rule for capital gains. If you sell any stock for a profit, the IRS wants the taxes due on the gain.

References

• IRS: 10 Facts About Capital Gains and Losses