There are different types of stock transactions, all of which have different tax implications. Find out if yours fall into these categories, and what that means for your taxes.
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How Stock Transactions Affect Your Taxes
Keep track of what you paid for your stocks and when you bought them. Make sure to track any stock splits and if you have mutual funds track reinvested dividends as well as additional investments into your funds. This information is all used to calculate your cost basis so you can show the least possible gain, or highest loss when you sell your stock.
Afraid you might own worthless stock?
First, make sure your stock is worthless, and keep whatever proof you have in your tax records should the IRS ask for it. When you have stocks that have become completely worthless, report them on Form 8949 (Sales and Other Dispositions of Capital Assets) with your purchase date and December 31 as the date sold. The total transactions from Form 8949 will be carried to Schedule D and Form 1040.
If you sell stock for a loss, then buy the same stock within 30 days, you have what is called a wash sale and are not permitted to claim the loss from the initial sale. But, the loss isn't entirely gone, as it may be added to the basis of the stock for a later sale of the stock.
Long-term and short-term transactions
Long-term capital gains are gains from the sale of stocks, bonds, collectibles, and other assets you have owned for more than one year. It is important to keep track of your ownership period because there are lower tax rates on long-term capital gains. Short-term gains are taxed the same as your other income, long-term gains are taxed at 0%, 15%, or 20%.
The long-term capital gains rate schedule
The capital gains tax rates changed under the Tax Cuts and Jobs Act (TCJA) passed in 2017. Under old tax laws, increases or decreases in the tax rates were tied to the regular income tax rate changes. Under the TCJA, the capital gain tax rate change is no longer tied to the regular income tax rates, but instead, is now a separate part of the Internal Revenue Code (IRC).
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