The US Tax Code recognizes the profits resulting from stock ownership as capital gains, which are generally taxed at a lower rate than your other income or wages. You pay the taxes due on such profits when you file your regular income taxes.
Realizing Capital Gains
You only have a taxable capital gain on your stock investments if you sold shares of stock during the year for a profit. If you do not sell a stock, you will not have a reportable taxable gain and no taxes are due. It is possible to own shares of a specific stock for many years and never pay taxes on the gains, as long as the shares are not sold.
Short-Term and Long-Term Gains
The capital gains on stocks you have sold must be divided into short- and long-term gains. Long-term gains are from stocks you held for more than one year on the date you sold them. Short-term gains are from stocks owned for one year or less when the shares were sold. Short-term gains are taxed at the same rate as all other income. Long-term gains are taxed at a much lower rate than your regular income tax rate. The actual rate is based on the amount of your taxable income.
Report the capital gains from the sale of stock on Schedule D and attach it to your regular income tax return. Report the purchase date and price of each stock sold, as well as the sale date, price and number of shares sold. The form is set up in two sections for long-term and short-term capital gains. Only stocks sold during the tax year are reported on the Schedule D.
When you lose money from the sale of a stock, you incur a capital loss, which can be used to offset any gains from selling other stocks. Capital losses are also divided into short- and long-term categories, using the same one-year cutoff. Use short-term losses to offset short-term gains and long-term losses against long-term gains. Any left over losses are used against the other type of gains. If total losses exceed the gains, up to $3,000 in capital losses can be used to offset other income in any one year.