If y'all play the stock market place (if you're no longer crush shocked by the volatility of the past couple of years) yous may desire to know a piffling about the taxability of your securities transactions.

Capital Gains Tax

Any turn a profit you savour from the sale of a stock held for at least a total year is taxed at the long-term capital letter gains charge per unit, which is lower than the rate applied to your other taxable income.  It'southward fifteen% if you are in a 25% or higher tax bracket and merely 5% if yous are in the 15% or lower taxation bracket. Profits from stocks held for less than a yr are taxed at your ordinary income tax rate.

Ordinary dividends earned on your stock holdings are taxed at regular income revenue enhancement rates, not at capital gains rates. Still, "qualified dividends" are taxed at a very advantageous capital letter gains rate of 0% to a maximum of 15%. For dividends to exist classified equally "qualified" they must be paid by a U.S. corporation or a qualified strange corporation and the holding flow of the stock must be more than than sixty days. At that place are plenty of other exceptions and definitions, so check with your broker or taxation advisor to encounter if the dividends for your stock holdings are "qualified." Dividends on stock held in a qualified retirement plan are not taxable income.

I believe Congress enacted the lower capital gains rate to drive investment. Later on all, almost tax laws are passed every bit a form of directing social behaviors. Exist sure to follow what happens to the upper-case letter gains rate during the grade of the next several months. President Obama has thrown out the idea of raising the capital letter gains tax rate many times, although nothing has happened still. In fact, at this writing, the talk is that the current rates will remain in event for the side by side two years. If that doesn't happen and as a year-cease tax tip, I advise you to sell appreciated stock held more than a year while the lower rates are in effect.

Stock Sales

When determining your turn a profit from a stock sale, it's of import to understand not but the formula, but the meaning of the variables in the formula. Certain circumstances applied to the variables tin can reduce your tax liability when you sell. Many taxpayers believe they must pay taxes on the full amount of the check they receive from the auction--not true. You can subtract your basis.

The formula is: Sales Gain – Footing = Taxable Turn a profit or Deductible Loss

Sale gain can exist reduced by commissions paid to the broker.

Basis is the cost of the stock plus any reinvested dividends and commissions paid for conquering. If you inherited the stock, the footing is the fair-market value of the stock on the date of the decedent's death or the alternate valuation date. If the stock was received equally a gift, the footing is the lower of the fair-marketplace value or the basis of the donor at the time the gift was made.

The Wash Rule

Many investors benefit from selling a stock in a losing position to offset a gain, and so turn around and buy the stock right back.

However, the IRS volition not allow an investor to merits a capital letter loss if y'all sell a stock and buy it back within 30 days. The "launder rule" prevents you lot from claiming a loss on a sale of stock if you buy replacement stock inside the 30 days before or after the auction and you volition lose the offset.

Uppercase Losses

One of the large limitations in stock investing is the amount of losses yous are allowed to deduct on your tax return. If you sell stocks at a loss, you may deduct only $three,000 per year; the remainder of the loss is carried forward to future years. You may apply capital losses against upper-case letter gains in the current and future years to net out the overall profit or loss.

Deductible Investment Expenses

A tax deduction often disregarded past investors is the cost of direction fees paid to brokers, usually for management of mutual fund accounts or for advisory services. You may deduct these fees every bit an investment expense on Schedule A of your tax return. Some brokerage 1099s or year-cease statements volition state the total for the year, merely many do not. You may have to call your broker to notice out how much y'all paid.

Inspect Taxpayers oftentimes forget about a stock sale when compiling their income tax return, which results in the IRS sending a CP-2000 letter. The letter is about 12-pages long and somewhere in the middle is a listing of omitted items and a calculation of the tax liability on those items. If you receive one showing an omitted stock auction, don't merely pay the tax bill. The IRS only knows about the stock sale; they have no clue as to what your basis in the stock is. Remember the formula before? You may really have taken a loss on the stock and that means no taxation liability whatsoever. In fact, you may be entitled to a refund. So call the phone number on the front of the letter and permit them know that you volition meliorate that tax return.

However, first Jan. 1, 2011 as a function of the Emergency Economic Stabilization Deed of 2008, brokerage firms volition be required to study the cost basis and gain/loss information to the IRS on their class 1099, which will be issued in 2012. This will streamline the tax grooming process considerably and effect in authentic CP-2000 letters beingness sent to taxpayers. It will also cut downward on the number of amended tax returns that demand to exist filed equally a result of omitting stock sales.

Bonnie Lee is an Enrolled Agent admitted to do and representing taxpayers in all 50 states at all levels inside the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, "Taxpertise, The Consummate Book of Dirty Piddling Secrets and Hidden Deductions for Small Business organization that the IRS Doesn't Want You to Know," bachelor at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.