How to Calculate Taxable Income With Long-Term Capital Gains

Long term capital gains are profits on an investment that you owned for at least one year before selling it. You will need to know how to calculate short term (less than one year) capital gains and losses as well. You may be able to use short term losses to offset long term capital gains, thereby saving on taxes.

Things You'll Need

• Stock transaction records
• IRS Form 1040, Schedule D

Instructions

1. Figure out the cost basis for investments you have sold during the year that you owned for one year or more. Cost basis is the total expenditure for the investment. For example, the cost basis for shares of stock includes all transaction fees for the purchase and sale of the shares plus the price paid for the stock itself. Do not include income like dividends on stock or mutual funds. This is considered ordinary income by the IRS and is taxed accordingly.

2. Calculate your profit on the investment by subtracting the cost basis from the proceeds you received when you sold the investment. For example, if your cost basis for shares of stock was $1,100 and you sold the shares for $1,500, you made a profit of $400. In the event the cost basis for a particular investment is more than the sale proceeds, you have a loss, not a profit.

3. Add up the profit and loss from all long term investments you sold during the year. The result is your net long term capital gains for the year.

4. Follow the procedure in Steps 1 through 3 for any short term investments you sold during the year. If you find you have a net short term capital loss for the year, you can use it as a tax deduction to offset some or all of your long term capital gains.

5. Subtract the net short term capital loss from net long term capital gains. The remainder is your taxable long term capital gains income.

6. Include your taxable long term capital gains income with the rest of your income when you file your taxes. To do this, complete IRS Form 1040, Schedule D (Capital Gains and Losses) and file it with your tax return.

Tips & Warnings

• Long term capital gains tax rates are lower than those for ordinary income. As of 2009, if the marginal (highest) tax rate on your income was 15 percent or less, the long term capital gains tax rate was zero. Otherwise, it was 15 percent.

References

• Motley Fool: Reconcile Capital Gains and Losses
• Money Chimp: Capital Gains Rates (2010)
• IRS Publication 17: Your Federal Income Tax / Sale of Property
• Charles Schwab: Calculate the Cost Basis Before You Sell
• Bankrate: Reporting Your Capital Gains (or Losses)