Stock, and other equity Buy/Sell transactions, are reported as long term gains, short term gains, and ordinary income. So what does that all mean at tax time? Like most things tax related, the answer has several ifs, ands, and buts (English majors and Lawyers), or if, then, and else (computer types).
If we temporarily forget about losses, short term gains are added to ordinary income (39.6% max fed tax rate). Long term gains are taxed on a sliding scale based on income, with a maximum 20% rate. A good deal. Gains are simple.
When you sell an asset like stock for less than you paid, things become more complicated. Gains are infinitely additive to income. Losses are not infinitely subtractive. Here's how it works:
If you have a long term loss, subtract it from any long term gains you have that year, then :
If you don't have any (or enough ) long term gains to cover the loss, subtract the remaining loss from any short term gains you have, then:
If you still have remaining losses, deduct $3,000 of the loss from your income. Any loss beyond that is carried forward to next year and subtracted from gains and/or deducted from income ($3,000) using the same rules, and carried forward again.
If you have a short term loss, subtract it from any short term gains you have that year, then :
If you don't have any (or enough ) short term gains to cover the loss, subtract the remaining loss from any long term gains you have, then:
If you still have remaining losses, deduct $3,000 of the loss from your income. Any loss beyond that is carried forward to next year. Rinse and repeat.
These rules have planning consequences. For example: You wouldn't want to take a $12,000 gain in December, then a $12,000 loss in January, which could take you 4 years to write down. You would also not want to take a $3,000 Long term gain and a $3,000 short term loss in the same year. If you can spread them over 2 years, you can take the gain at a max 20% rate, and deduct the loss at up to a 40% rate.
A good tax professional who has your records on file and an understanding of your overall tax situation can do what-if scenarios for you. In July. When you need them.
My business number rings through to my personal phone. Year 'round. Why settle for less ?
The above is only a general description of the capital gains tax structure. There are special cases for primary residences, wash sales, recaptured depreciation............