When you sell shares of stock for a profit, you have earned what is referred to in the tax laws as a capital gain. The gain will be reported under the capital gain rules on your regular income tax return. The amount of taxes you pay is dependent on several different factors.
Short-Term or Long-Term Gain
The first step to calculate the tax owed on a stock gain is to determine whether the gain is a long-term capital gain or a short-term capital gain. If the stock was owned for one year or less, the gain will be a short-term gain. Stock owned longer than one year will produce a long-term capital gain when the stock is sold. The gain will be reported as such on your tax return. The amount of your gain is the price at which you sold the stock minus the price you paid.
Your Tax Bracket
The amount of tax you will pay on your stock gain is dependent on your marginal tax bracket. As of 2011, the U.S. income tax has six tax brackets: 10, 15, 25, 28, 33 and 35 percent. Your marginal tax bracket is the tax rate you will pay on your next dollar of income above your current earnings. Your personal tax bracket is dependent on your filing status, amount of total income and level of deductions.
Capital Gain Tax Rates
If your stock gain is a short-term gain, the profit will be taxed at your regular, marginal tax rate. For example, if you are in the 28 percent tax bracket and earned a $10,000 profit, your tax due on the gain would be $2,800. Long-term capital gains are taxed at a lower rate. If your marginal tax bracket is 10 or 15 percent, you pay zero taxes on a long-term gain. If you are in the 25 percent or higher marginal income tax bracket, the rate is 15 percent. Using the 28 percent tax bracket and a $10,000 gain, the tax on a long-term gain would be $1,500.
If you have sold other investments during the year for a loss, those capital losses can be used to reduce the taxable amount of your stock gain. Investment losses reduce capital gains on a dollar-for-dollar basis. So if you had the $10,000 gain and also $2,000 in losses from other investments, you would pay either the long-term or short-term tax rate on the net gain of $8,000.
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.