Realized Capital Gains

• When trading shares of stock, you owe taxes on realized capital gains. Realized capital gains occur when you sell shares of stock at a profit. For tax purposes, realized capital gains are categorized as either short- or long-term capital gains. Short-term capital gains are taxed at ordinary income tax rates of 10, 15, 25, 28, 33 and 35 percent. Alternatively, long-term capital gains are either tax-free or taxed at 15 percent rates. To qualify for long-term realized capital gains, you must hold shares of stock for at least one year before making a sale.
  
  

Cost Basis

• Cost basis and cash proceeds account for brokerage commissions when you calculate realized capital gains. For example, you may open up an account through an online brokerage that charges $10 in trading commissions. Through the account, you purchase 80 shares of Corporation Y at $50 per share. The cost basis for this transaction is $4,010 ($50 x 80 shares = $4,000 + $10 brokerage commissions = $4,010). Later that year, you sell off your Corporation Y position at $90. Your cash proceeds on the sale are $7,190 ($90 x 80 shares = $7,200 - $10 brokerage commissions = $7,190). After the sale, you would owe taxes on $3,180 worth of realized capital gains ($7,190 - $4,010 = $3,180).
  
  

Realized Capital Losses

• If your investments fail to perform, you can deduct $3,000 in realized capital losses from your taxable income each year. Realized capital losses occur when you sell stock at a loss. Include brokerage commissions within your cost basis and cash proceeds when calculating realized capital losses. Stock market losses that exceed $3,000 for the year may be carried forward as deductible items on future tax returns. Be advised that the IRS prohibits wash sales for tax write-offs. In a wash sale, you sell a stock at a loss and immediately buy it back within 30 days.
  
  

Investment Strategy

• When buying stock, your ultimate goal remains to generate the highest return for the least amount of risk. Balancing risk versus reward does not always translate into a minimal tax bill. For example, you should not place multiple stock market trades simply to increase your deductible brokerage commission cost. Frequent trading may cause you to miss out on significant long-term gain.