Capital Gains and Losses
When you sell a security, you will generally have either a loss or a gain. While gains are taxable, losses can be leveraged against gains to reduce your overall tax liability. Learn how to use this information in developing your trading strategy.
As soon as the sale of securities occurs, you determine your fate in terms of gains and losses. If you sell the position for a greater price than your cost basis (which is the original cost of the shares including commissions) you have a realized gain. If you sell the shares for less than the cost basis, you have a realized loss.
John buys 100 shares of ABC for $20.00 per share and pays a $20 commission, for a total transaction cost of $2,020. Dividing that by the 100 shares purchased, John has a cost basis of $20.20 per share.
If John later sells ABC for $25 per share, he will have a gain. If he sells for $19.00 per share, however, he will have a loss.
Capital gains are reported on Form 8949 and 1040 Schedule D. Cost basis is tracked by GainsKeeper and reported on the 1099-B sent from Firstrade.
Writing Off Losses
Losses can present a great way to offset your gains, making them an important part of a balanced tax strategy. But there is an order for the deduction:
- Losses for short-term holdings are initially written off against short-term gains. If, after doing so, you’re left with a net loss, it can be deducted from long-term losses.
- Long-term losses are written off against long-term gains, but an excess can be written off against short-term gains.
- If you still end up with a net loss after factoring both long- and short-term gains, you can deduct up to $3,000 of the loss from other income. The remainder can be carried forward to the next tax year.
In order for a gain or loss to appear in one tax year, the trade must be executed by December 31 of that tax year. Settlement need not occur in the same tax year unless the transaction is a short sale.