Stock and Taxes

Taxes are a complicated subject so let me say first I'm not a stock expert nor a tax expert, and I definitely recommend you check with someone skilled in both areas before you file your tax forms :) This is simply my own research into this area, and my understanding on how the world of stock and taxes intermingle.

First, you have stock sales incomes. So let's say you had bought $1,000 worth of Amazon two months ago. You're selling those shares now and they're worth $3,000. The IRS considers this as $2,000 income to you. You do get to subtract the transaction fees and so on that it cost you to do the transactions. So let's say that you had a transaction fee of $20 both for the buy and sell process. That's minus $40 from your $2,000 income - leaving you with $1,960 to declare on your taxes. Straightforward, simple, no other brainpower needed. It is normal income.

OK, scenario 2. Let's say it was 10 years ago that you bought $1,000 worth of Amazon stock. Now here it is, 10 years later, and you sell the shares and they're worth $3,000. Once again you have made $2,000 income - but wait! Because you had owned that asset of stock for OVER A YEAR, the IRS treats it a bit differently. They are now considered CAPITAL GAINS which is taxed at a lower rate. So it's really in your best interest to hold onto stock for more than a year in most cases, unless you're really going to make high amounts of money through buying and selling frequently. The Capital Gains tax percentage varies based on your income level. So for example in 2010 if your income made you fall into the 25% tax bracket, your capital gains tax on any stock income you made would only be 15%. So you pay less tax on that stock income. You'll want to check the IRS tax website to see exactly what your capital gain tax level is for a given year, based on your household income.

Sometimes stocks get a little tricky. Let's say 10 years ago you bought $1,000 worth of Amazon stock at $10/share. Now let's say 5 years ago you liked Amazon so much that you bought another $2,000 worth of Amazon stock at $15/share. So now you have a pile of shares that you bought at different prices. Let's say you need some quick money and you decide to sell just 10 shares of the stock to get that money to you. How does the IRS know if you're selling your "old" stock (that you bought at $10/share) or your "newer" stock (that you bought at $15/share)?

By default, the IRS assumes that whatever you bought first is what you're selling first. So if you sell 10 shares, it will assume that those were shares from 10 years ago.

However, IF YOU WANT, you can actually specify exactly which shares you want to sell. You need to be sure to talk to your broker about it because this specifically has to be done AT THE TIME OF SALE (i.e. you can't randomly decide when you're doing your taxes months later how you want to allocate things). So if you care about which shares get sold - because it will affect the profit you make - then you need to specify that when you perform the actual sale.

Good luck!

Taxes and your Home Business
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