The taxes involved with stock investing are called capital gains taxes. If you buy something -- such as stock shares -- and sell for a profit, the result is a capital gain. For investors, there are different types of capital gains, and losses from investing -- capital losses -- can be used as tax deductions. The results of all this stock market buying and selling must be reported on your annual income tax return.
A capital gain or loss only occurs when a stock investment is sold. If he chooses, an investor can buy shares of stock and hold as long as he wants and never pay capital gains taxes. Selling shares puts a value on the gain, causing the gain to be "realized" and reported for tax purposes. All of the gains or losses from stock and other investments an investor realizes during the course of the year are reported on the investor's tax return.
Short and Long Term Gains
The tax rules divide capital gains and losses into short term and long term categories. Long term is for stocks owned for longer than one year when the gain or loss was realized. Short term is for holding periods of one year or less. Long term capital gains are taxed at preferential rates while short term gains are taxed at the investor's regular income tax rates. There is a required order for the use of long and short term capital losses, with losses first used against the same type of gain, then the other type and finally against other income.
Wash Sale Rule
The wash sale rule applies to the validity of capital losses. The rule prevents an investor from selling stock for a tax loss and buying the shares right back. For a capital loss to be a valid loss for tax purposes, the same stock cannot be purchased during the period from 60 days before until 60 days after the sale date of the shares. The wash sale rule does not apply to capital gains. The IRS always wants its taxes from stock market profits, even if the investor buys the shares right back after selling.
Planning and Records
An investor is required to list each stock sold during the year on his tax return with the resulting capital gain or loss. It is helpful to keep track of long and short term gains and losses during the year to have an idea of the amount of taxes due when filing season comes around. Money from stock sold for gains can be reinvested at any time into more or other stocks. Consider short and long term tax consequences as well as the wash sale rule before selling stock for a loss.
- IRS.gov: Ten Important Facts About Capital Gains and Losses
- Fairmark.com; Capital Gains and Losses 101; Kaye A. Thomas; April 2011
- Internal Revenue Service. "Topic No. 409: Capital Gains and Losses." Accessed Dec. 1, 2019.
- Internal Revenue Service. "Publication 544: Sales and Other Dispositions of Assets." Accessed Dec. 1, 2019.
- Internal Revenue Service. "About Form 8949, Sales and other Dispositions of Capital Assets." Accessed Dec. 9, 2019.
- Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 57. Accessed Dec. 1, 2019.
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.