Tax Information on the Sale of Stocks
by John Galt
The sale of a stock usually results in either a capital gain or a capital loss. Any profit made on the trade is taxed at the applicable capital gains tax rate. These taxes can be levied by both the IRS and your state revenue department.
Short-Term Capital Gain
When a stock is sold for a profit after being held for a year or less, it is classified as a short-term capital gain. Taxes on short-term capital gains are equivalent to your applicable marginal tax rate for earned income.
Long-Term Capital Gain
When profit is made after selling a stock held longer than a year, it is considered a long-term capital gain. According to the IRS, long-term capital gains tax is a maximum of 15 percent, and it can be even lower for low-income taxpayers.
Short-Term Capital Loss
When a stock held for a year or less is sold at a loss, it results in a short-term capital loss. Short-term capital losses can be deducted against short-term capital gains. If you do not have enough short-term capital gains to deduct against, then the short-term capital loss can be carried over to be used as a deduction in future years. Capital gains losses carry over indefinitely, and they can be willed to your heirs.
Long-Term Capital Loss
When a stock held for more than a year is sold resulting in a loss, it is a long-term capital loss. Long-term capital losses are deductible against long-term capital gains. Long-term capital losses can be carried over to future years in the same fashion as short-term capital losses.
When a company sells its own stock through an initial public offering (IPO) or a secondary offering, there is no tax effect. However, the balance sheet must be adjusted to reflect the sales.