How Are Gains From Stocks Reported to the IRS?

Types

When you sell a stock, the transaction triggers a capital gain or loss. If you have held the security for more than one year, the IRS considers the gain or loss long-term. If you have held the security for one year or less, the IRS classifies the proceeds as a short-term capital gain or loss. The IRS generally taxes short-term capital gains at a higher rate than long-term capital gains. If you own a mutual fund, you might receive a capital gains distribution that prompts stock-selling activity within the fund. You must also report mutual-fund gains and losses. However, the IRS handles these differently from the capital gains you generate from your own stock sales.

Use Schedule D of your tax return to report all your capital gains and losses. The IRS allows taxpayers to use up to $3,000 worth of capital losses to offset capital gains. If you sold one stock during the year and lost $3,000, you can deduct the loss from your taxable income. If you made the aforementioned sale and one another, which netted a $1,000 gain, you could deduct a $2,000 capital loss. If you have capital losses that exceed $3,000, the IRS allows you to carry them over to the next year. Do not report capital gains distributions received from mutual funds on Schedule D; instead, report them in Box 10 of the 2010 version of IRS Form 1040A.

Know your cost basis, the original price of an asset minus expenses, when inputting stock transactions on Schedule D. You can choose various methods to determine cost basis, particularly if you purchased and sold the same stock multiple times throughout the year. Consult your investment firm or advisor for assistance specific to your situation. To calculate your cost basis, consider this example: You paid $990, including commission charges, to purchase 100 shares of a stock in January 2010. You sold the stock later in the year and realized proceeds of $1,000, less commissions. Your cost basis for this short-term capital gain of $10 is $990.

If you hold your stocks or mutual funds inside a tax-deferred account, such as an IRA, you do not have to pay capital gains right away. In fact, with a Roth IRA, you may never have to pay them. The IRS allows capital gains to accumulate, tax-free, in accounts such as IRAs and workplace retirement plans. When you withdraw money from a traditional IRA, the IRS taxes the entire amount, including capital gains. With a Roth, if you wait until you turn 59 1/2 and have held your account for at least five years, you can withdraw all your money, including capital gains, tax-free.