When you sell stock, there are tax implications. Stock is considered a capital asset and when you sell it, you are taxed on any money over what you purchased the stock for; this is called a capital gain. Conversely, if you lose money on a stock sale, it's considered a capital loss and you can deduct it up to a certain amount. If you have both gains and losses they are combined and taxed in a specific way. The IRS Form 8949 and Schedule D are the tax forms that will be used to report these transactions.
When you buy and sell stock, the company you use to purchase your stocks through is called a broker. Typically, when you've sold any stock, you broker will send you (and the IRS) a tax form at the end of the year detailing what you purchased and sold the stock for; this form is called a 1099-B. Please note - retirement account stock transactions are handled differently and for the purposes of this post, I'm only referring to stocks held outside of a retirement account.
How long its been since you purchased the stock is called the holding period and this is important to the tax rates that will apply. Stock held for one year or less are considered a short term gains or losses. Stocks held for more than one year are considered a long term gains or losses. Long term gains have more favorable rates than short term gains. Therefore, this presents an opportunity for tax planning. That is, strategically assessing your income for the year and future years as well as looking at your portfolio to determine whether selling certain stock to offset gains for the current or future years would save you money in taxes. Continuing the discussion on stocks, each time you purchase stock, you should keep track of how much you spent as well as detail each company's stock you purchased. These amounts should be separately tracked and will eventually be netted to determined whether (for the tax year) you've had a long or short term gain or loss. Your broker may track these for you and send you a 1099-B (see above), but it's a good idea to track them yourself or utilize an app or software to do this as well.
Reach out to me if you need help with figuring out how much to plan to set aside for your stock activity as well as finding ways to lower your tax burden.
J.K. Lasser Institute. (2020). J.K. Lasser's Your Income Tax 2020. Hoboken: John Wiley & Sons, Inc.
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