How to Calculate Capital Gains on Short-Term Investments

The need to pay capital gains taxes is a cost of doing business for short-term investors, and should always be included in determining the value of an investment and the true profit to be gained from a sale. Capital gains taxes on short-term investments held for one year or less are assessed at the same rate as taxes on ordinary income.

Instructions

Difficulty: Moderately Challenging

Things You’ll Need:

• IRS Schedule D
• Records of short-term capital gains events

Prepare to Calculate Capital Gains on Short-Term Investments

1. Create an active transaction register or spreadsheet of all short-term capital gains events and maintain it throughout the year. Each line of your spreadsheet should reflect all details of an asset sale along with the details and cost of the corresponding purchase.
2. Add commission and brokerage costs to the purchase price of each asset bought and subtract corresponding costs from the sale price of each asset sold.
3. Reconcile the lines on this spreadsheet against your monthly brokerage statements as you receive them, just as you would reconcile your checking account register against your monthly bank statements.
4. Check the detailed report of your sales of stock or other securities that you receive from your investment brokerage for any transactions that may require special treatment or the help of an accountant, such as some short sales of stock.
5. Remove any transactions involving assets held for more than 1 year from your transaction register and keep separate records of these capital gains events for long-term investments.

Calculate Capital Gains on Short-Term Investments

6. Use your complete year transaction register at tax time to enter each short-term capital gains event on Schedule D, Part I, or a supporting detailed schedule if you experienced more than five short term capital gains events.
7. Enter the net sales price for each short-term asset sold during the year in column (d) of Schedule D, Part I. The net sales price reflects adjustments to the gross sales prices for commissions and other allowable selling expenses.
8. Post the corresponding cost basis of each asset, reflecting your purchase price adjusted for any commissions or other allowable purchase expenses, in column (e) of Part I.
9. Calculate your capital gains or losses on short-term investments by subtracting column (e) from column (d), then enter the amount in column (f) for each individual transaction.

Tips & Warnings

• Active investors and traders should plan for and include the cost of the time or professional assistance required to calculate their capital gains taxes and maintain necessary documentation in determining the value and profitability of their enterprise.