| Once you sell stock, you will either have a capital gain | | | | shares. Note: Once you have chosen one method for |
| or loss for tax purposes. Here are the steps for | | | | a particular stock, you can't change it. |
| figuring out your taxes: | | | | 2. Long term or short term - A capital gain or loss is |
| 1. Figure out cost basis - If you have bought shares | | | | long term if a stock was held for at least one year |
| of a certain stock in multiple batches, then the cost | | | | and a day. Otherwise, it is a short term gain or loss. |
| basis will determine which shares are being sold. We | | | | This is another reason we have to choose a cost |
| need this information so that we can subtract the | | | | basis and differentiate between batches of stock. A |
| buy price from the sale price, thus figuring out if we | | | | short term gain is taxed at your regular tax rate, |
| had a gain or loss on the trade. | | | | while long term gains are taxed at a reduced rate. |
| There are two choices: FIFO (First in First Out) and | | | | 3. Capital loss limit - This is currently $3,000 and is the |
| LIFO (Last in First out). With the first method, we | | | | maximum amount of loss that can be applied against |
| always assume that we first sell the oldest stock. | | | | non-investment income for the year. Any amount |
| With the second method, we assume that we are | | | | over this must be carried over to the next year. |
| first selling the newest shares. As an illustration, let's | | | | For example, let's say that you have a $10,000 loss |
| assume that we just sold 100 shares of IBM at $60. | | | | this year and made $45,000 in your regular job. You |
| We look at our records and see that we bought 40 | | | | can reduce your income to $42,000 and then carry |
| shares a year ago at $53/share and we bought an | | | | over $7,000 to next year. On next year's return, you |
| additional 70 shares three months ago at $67/share. | | | | can then apply the $7,000 against any capital gains |
| Now, if we use FIFO, then we have sold 40 shares | | | | and again subtract a maximum of $3,000 from your |
| that were acquired for $53 and 60 shares that were | | | | other income. Capital losses can be carried forward |
| acquired for $67/share. We end up with a loss of | | | | indefinitely until they are used up. |
| $140 and are left with ten of the $67 IBM shares. On | | | | 4. Wash Rule - If you sell a stock for a capital loss, |
| the other hand, if we use LIFO, then we sold 70 of | | | | then you cannot buy the stock back until at least 30 |
| the $67 shares and 30 of the $53 shares. We end up | | | | days have passed. |
| losing $280 and are left with ten of the $53 IBM | | | | |