Stocks and Taxes

[mrpaseo]

Alright, I am new to this area, this past year I put a few dollars into some stocks and today I was about to do my first sale (Actually in the green). I am trying to figure out profit before I pull the "Sale" trigger and realize I don't know how to calculate the taxes. Let's say I invested 1000 into a stock, I am about to sell for 1100. Do I calculate taxes only on the profit of 100 or would I pay taxes on the full 1100? I know this seems like a dumb question, my instincts tell me only the 100 profit but knowing what little I know about the tax codes they might just slam me for taxes as income on the whole thing.

Any input would be great,
Thanks,
Ray

[Broken Arrow]

No, not a dumb question at all. It's actually a bit confusing.

You are taxed on the earnings you make, so yes, only the $100.

Assuming this is a taxable account, you are subjected to capital gains tax.

Securities that are held for one year or less are subject to short-term capital gains. For all practical purposes, short-term capital gains is taxed the same as earned income.

Securities that are held for more than one year are subject to long-term capital gains. The tax rates here are lower, and for 2008, the first two income tax brackets pay only 5% in capital gains. Above that, you pay 15%.

Please also note that these rates are subject to change. Obama has already stated that he wants to hike up the capital gains for those in the higher income tax brackets.

[mrpaseo]

BA that makes perfect sense, thank you for taking the time to respond to my question.

v/r,
Ray

[Like2Plan]

Ray,
You need to determine your adjusted basis, too. You are only taxed on your profit. In other words, the cost to buy and sell the stock does not count as part of your profit. You will get some help with the 1099-B.
(And, hopefully, you haven't had any spin offs from your stock?..)
Another trick is if you participated in a dividend reinvestment plan, remember you have been paying taxes on the dividends in the year they were earned so you have to account for that. (It also makes things a touch more complicated if you are selling everything and you haven't held the stock purchased with the reinvested dividends for more than a year)

Here is a link to the IRS publication. Publication 551 (5/2002), Basis of Assets


Stocks and Bonds
The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. If you get stocks or bonds other than by purchase, your basis is usually determined by the fair market value (FMV) or the previous owner's adjusted the basis of stock.

Here is the form you will have to fill out. If you use Turbotax or such, they will walk you through the steps.
link to schedule D

Link to the instructions. (Look at D-7)

[mrpaseo]

Ahhhh, what do you mean "Spin offs"?

[disneysteve]

Ahhhh, what do you mean "Spin offs"?

Sometimes a company sells off one division and it becomes an independent company and issues it's own stock. Shareholders of the parent company may be issued shares in the new company.

For example, a number of years ago, Pepsi spun off their fast food division (KFC, Taco Bell, Pizza Hut, etc.). In addition to keeping my Pepsi stock, I also now hold shares in the new company, YUM. Or when Disney spun off Citadel broadcasting, so I now have shares in both companies.

Those transaction need to be figured into the cost basis when you sell shares.

[mrpaseo]

Alright, I am not in that catagory, I did have one company buyout from another in which they sent me the procedes of my shares (At a loss), and then there was this other company who just one day said, okay, were done, were out of money so shareholders..... sorry.

lol, like I said, lessons learned.
Ray

[zetta]

If you use the right version of Turbo Tax (look for the one that covers either stocks or investments) to prepare your taxes, it will help you figure out what you owe. Much easier than doing it by hand!

[mrpaseo]

I usually have my taxes done by the Military (Free), can't beat that price anywhere, though, I think I might be entering territory that they do not touch (Stock sales).

We'll see, it should be a pretty easy year since I spent all but 18 days of it in Iraq.

Ray

[Broken Arrow]

Thank you for your service to our country!

[MaxPowers]

I usually have my taxes done by the Military (Free), can't beat that price anywhere, though, I think I might be entering territory that they do not touch (Stock sales).

We'll see, it should be a pretty easy year since I spent all but 18 days of it in Iraq.

Ray

I wonder how much you will get back... Like $5? lol

Im in Africa right now, spent all but 3 months here, will spend all but 4 months next year.

[mrpaseo]

Max are you at the horn? Not sure I want to go to that country.

From what I understand I will receive the earned income credit and anything my wife paid into taxes. Should be a nice little bonus.

What branch?
Ray


Broken Arrow, seriously, the pleasure is all mine, I can't believe they pay me for what I do, I absolutley love my vocation. (Active Duty Army 16.5 years and counting)