Capital Gain

A capital gain is the profit realized from holding a security. A short-term capital gain is the profit realized on a security held for one year or less. A long-term capital gain is the profit realized on the sale of a security held for more than one year.

How to Calculate Short- and Long-Term Capital Gains
How Capital Gains Tax is Calculated
How GainsKeeper Can Help Investors Calculate Capital Gains

How to Calculate Short- and Long-Term Capital Gains

The basic rule for calculating capital gains is the sales price minus the cost of selling less the adjusted tax basis (cost basis), which equals the taxable capital gain or loss.

The general principle is that a taxpayer must net short-term capital gains against short-term capital losses to get a total short-term capital gain or loss. Then net long-term capital gains against long-term capital losses to get a total long-term capital gain or loss. Finally, net the total short-term capital gain or loss against the total long-term gain or loss.

If the result is a capital loss, whether short-term or long-term, up to $3,000 of it (or up to $1,500 for married people filing separately) can be deducted from ordinary income. If capital losses exceed this amount, an investor can carry the losses over and deduct them in subsequent years until they are used up. Short-term and long-term capital loss carryovers retain their short or long-term character when they are carried over. This implies that in a subsequent year a long-term capital gain cannot be reduced by a capital loss carryover and the taxpayer may end up paying a tax on that gain.

How Capital Gains Tax is Calculated

Short-term capital gains are taxed as ordinary income. Therefore, the nominal tax rate will be whatever tax bracket the investor is in.

The majority of people now only have two capital gains tax rates to worry about - 5% and 15%. Long-term capital gains are taxed at 5% for taxpayers in the 10 or 15% income tax bracket overall, and 15% if taxpayers are in any other tax bracket. The long-term capital gains are included when figuring out the investor's tax bracket. However, the 5 or 15% rates do not apply to all long-term capital gains. Long-term capital gains on collectibles, some types of restricted stock, and certain other assets are instead subject to a minimum 28% rate.

It is important to note that corporate actions change the cost basis of a security. It cannot be assumed that the purchase price is the cost basis. It is important to track corporate actions because otherwise investors can significantly overstate capital gains increasing tax costs. They can also understate capital gains leaving them liable for back taxes, interest and other penalties.

Wash sales pose another challenge in calculating capital gains tax. A wash sale is trading activity in which shares of a security are sold at a loss and a substantially identical security is purchased within 30 days. The subsequent purchase could occur before or after the security is sold, creating a 61-day window. A wash sale will defer losses (possibly increasing capital gains tax due) and increase the cost basis of the new tax lot.

Generally, the proceeds of any stock, bond, or other securities sold during the year will be reported on IRS Form 1099-B by the brokerage or financial institution that carried out the sale.

How GainsKeeper Can Help Investors Calculate Capital Gains

GainsKeeper provides automated tax lot accounting tools to help investors calculate capital gains tax. GainsKeeper tracks investments and automatically adjusts for wash sales and corporate actions. GainsKeeper matches tax lots and calculates capital gains and losses. It also characterizes capital gains and losses as short or long-term. This information is then used to produce the Schedule D.