| Stock trades are taxed as capital gains, instead of | | | | $10. |
| regular income. They are computed on the IRS | | | | The FIFO (First In, First Out) method matches shares |
| Schedule D form, and follow different rules than the | | | | that are sold with the first shares bought and works |
| income from a job. | | | | forwards. So, in our example, the 10 shares we sold |
| This article presents an overview of the process: | | | | were from the $10 batch, so we have a $2 per share |
| 1. Taxes after sales - No taxes are paid until after a | | | | gain, and we have 10 shares left with a cost basis of |
| stock is sold - when it can be determined whether a | | | | $15. |
| gain or loss occurred. In other words, if you only buy | | | | 3. No Social Security or Medicare Taxes - Capital |
| stocks and never sell them, you will never owe a tax! | | | | gains are not subject to these taxes. |
| 2. Cost basis - This is the method used to figure out | | | | 4. Long term vs. short term capital gains - Any stock |
| which shares were sold. For example, if you bought 10 | | | | held at least one year and one day are considered |
| shares of stock ABC at $10, another 10 shares at $15, | | | | long term capital, and are taxed at a lower rate. Any |
| and then sold 10 shares at $12, do you have a gain of | | | | stock sold earlier is considered short term, and is taxed |
| $2 per share, or a loss of $3 per share? | | | | at the same rate as your regular income. |
| If ABC was a mutual fund, then the cost basis is easy | | | | 5. Capital Loss Limit - If, after adding up your stock |
| - it is simply the average of all shares purchased. In our | | | | market gains and losses, you have a loss larger than a |
| example, the cost basis would be $12.50 per share, so | | | | certain limit ($3,000 at the time of this article), then you |
| we would have a loss of 50 cents per share. | | | | can only subtract this limit from your other income. You |
| With stocks and Exchange Traded Funds (ETF's), the | | | | have to carry over the rest of the loss to the next |
| IRS does not allow us to average the costs basis. | | | | year. |
| Instead, we can select from the LIFO or FIFO method. | | | | For example, if you made $40,000 in your job and lost |
| You choose separately for each stock but, for any | | | | $40,000 in the stock market, you cannot say that you |
| one stock, once you choose FIFO or LIFO, you can | | | | made $0 for the year. Instead, you have income of |
| not switch to the other. | | | | $37,000 and you have to carry over $37,000 in stock |
| The LIFO (Last In, First Out) method matches shares | | | | losses to future years. |
| that are sold with the last shares bought and works | | | | 6. Wash rule - If you sell a stock for a loss and count it |
| backwards. So, in our example, the 10 shares we sold | | | | as a capital loss, then you cannot buy the stock back |
| were from the $15 batch, so we have a $3 per share | | | | until at least 30 days have passed. |
| loss, and we have 10 shares left with a cost basis of | | | | |