If you play the stock market, you likely need to know when you become liable to pay taxes on the profits you're hopefully making. Profits from owning stocks are called capital gains in the tax rules. A benefit of stock investing is that capital gains may be taxed at a lower rate than your other income or wages. If taxes are due from stock investments, they are paid when you file your regular income taxes.
Realizing Capital Gains on Stocks
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 and Long Term Capital Gain on Equity Shares
The capital gains on stocks you have sold must be divided into short- and long-term gains. Long-term gains are from stocks you had owned for longer than one year when the shares were sold. Short-term gains are from stocks owned for one year or less when the shares were sold. Short-term gains are taxed at your regular income tax bracket. Long-term gains are taxed at at the long-term capital gains rate. For most taxpayers, this is a much lower rate than your regular income tax rate. For the 2018 tax year, for example, the long-term capital gains tax rates are 0, 15, and 20 percent depending on your annual income. So, if you're in the 15 percent tax bracket, you likely will fall in the zero percent long-term capital gains rate. For high-income taxpayers, even the 20 percent rate represents a huge saving when compared to income tax rates.
Required Information for Schedule D
The capital gains from the sale of stock are reported on Schedule D and attached to your regular income tax return. For each stock sold you must report the purchase date and price, the sale date and 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 year are reported on the Schedule D.
If stocks are sold at a loss, the results are a capital loss and those losses 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. Short term losses are used to offset short term gains and long term losses go 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.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.