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-- Posted: July 5, 2000

Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

How do I figure out capital gains tax?

Dear Dollar Diva,
I started investing in stocks this year and have a portfolio of 12 companies with a total value of more than $35,000. I know I'll be selling some of the stocks in the future, but I don't know what I'm going to be facing in taxes when I do. Can you offer some advice or recommend a book that will help me deal with the capital gains when the time comes?

It's smart to understand the rules before you sell anything. Taxes can take a big bite out of your investment dollars, and you want to take advantage of whatever breaks you can get. Here is some general information about capital gains and some other sources for more in-depth study.

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When you sell a stock, the amount you receive is called your "proceeds," and it's reported to the IRS on a 1099-B. You will get a copy of this form around the same time you get copies of your W-2 and your 1099s reporting interest and dividends. "Proceeds" is the amount you will report as the "sales price" when you report the stock sale on Schedule D of your tax return.

Schedule D

Your capital gains are reported on Schedule D when you file your Form 1040. There are boxes on the form to report what you paid for the stock, including transaction costs and what you sold it for (this should be the same number as the "proceeds" reported on the 1099-B). The difference between the two is your capital gains.

There are two types of capital gains:

Capital Gains Holding Period
Short-Term One year or less
Long-Term More than a year

As a general rule, if you hold a stock for less than a year and sell it at a gain, there's no tax advantage. The gain is taxed as ordinary income like interest and dividends.

The tax break kicks in when you hold a stock for more than a year. And the richer you are, the more you save:

Tax Bracket Long-Term Capital Gains Tax Tax Savings
15% 10% 5%
28% 20% 8%
31% 20% 11%
36% 20% 16%
39.6% 20% 19.6%

Part IV of the Schedule D is where the tax is computed. You'll clutch your heart when you first lay your eyes on it, but if you take it slowly, one line at a time, it's not all that bad. Later on, the Diva will link you to a couple of resources that should help. Once you understand the concepts, doing the tax computation gets easier.

Capital Losses

Capital losses get combined with capital gains on Schedule D. If the net is a gain, you get to pay tax on all of it, even if it's a billion dollars.

If the net is a loss, you get to deduct it, but only up to $3,000, the maximum capital loss deduction allowed each year. If it's more than $3,000, the balance has to be carried over to future years where it can be used to offset future capital gains or provide a $3,000 a year deduction until it's used up.

Books to read

The Internal Revenue Service offers a free, user-friendly, book titled "Publication 17: Your Federal Income Tax -- For Individuals" to help taxpayers prepare their tax returns. Its 1999 version has 275 informative pages, including a good section on capital gains and losses. It shows how stock sales are reported on Schedule D and how the tax is computed. Another good resource is IRS "Publication 550: Investment income and expenses, including capital gains and losses."

If you've read the IRS publications and you're still clutching your chest, move on to Bankrate.com's "Tax advice book review" for leads on some good tax books. The Diva concurs with the author; the best selection for the tax novice is Taxes for Dummies.

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