How to Account for Selling Stock
Original post by Leslie McClintock of Demand Media
At its most basic level, accounting for the sale of a stock is simple. You keep a record of your tax basis in the stock (or your broker will keep a record for you, if the stock is publicly traded). When you sell the stock, however, you should be prepared to pay a tax on any gains you received, either short-term or long-term. The process with non-publicly traded stocks is the same, but the record keeping is more critical. Special circumstances and considerations apply when the stock sale is part of a business acquisition deal.
Subtract the value of the stock from the asset column on your balance sheet.
Add whatever cash you received for the stock to the asset column on your balance sheet. If you accounted for the stock purchase on your cash flow statement, add the cash received for the purchase as revenue on the same document. But don't spend all the money, if you sold at a gain. Unless you have capital losses to cancel out your gains, you will need to pay either a short-term capital gains tax to the Internal Revenue Service equal to your marginal income tax bracket if you held the security for less than a year, or a lower capital gains rate for longer-term holdings. If you are using the accrual system of accounting, add your estimated capital gains tax on the transaction to the liabilities column on your balance sheet.
Subtract the price you received from the price you paid, or your tax basis in the stock. Bear in mind, though, that if you buy the stock in a tax-deductible retirement account, your tax basis is zero, and your sale won't qualify for capital gains tax treatment. If the stock remains in the retirement account, there is no tax consequence whatsoever.
Look for a 1099 form from your brokerage company, if applicable. This form will list your tax basis in the stock as well as the sales price. Your broker will send this form to the IRS, which will use it as a check and balance against your tax return. You can use this form to help you with your accounting and record keeping.
Carry forward the tax basis on inventory and assets on any company sold, if the sale was structured as a stock sale. When one entity acquires another corporation through the transfer of stock, the buyer inherits the tax basis of the seller. If the sale was structured as an asset purchase rather than a stock purchase, however, the buyer would receive a favorable "step-up" in cost basis, assuming he paid more for the business assets than the original owner.
Tips & Warnings
- Section 338 of the Internal Revenue Code allows businesses to treat some stock sales as asset sales for the purposes of calculating tax basis. This arrangement tends to favor the buyer. These rules are complicated, so consult with an experienced tax adviser or attorney specializing in business acquisitions if this situation applies to you.
- MBBI.org: Structuring the Deal
- SmallBusiness.findlaw.com: Asset vs. Stock Purchases - Advantages and Disadvantages
- Korn Law Firm: Treating a Stock Sale as an Asset Purchase for Tax Purposes
About the Author
Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.