The Tax Consequences of Reinvesting Stock Capital Gains
Original post by Deborah Barlowe of Demand Media
As a taxpayer, the Internal Revenue Service (IRS) allows you to own a stock for however long you desire without paying taxes on the security’s increased value. The IRS requires you to pay taxes on the profit you make when you sell your stock, however, regardless of whether or not you reinvest your profit in another security. The IRS taxes your capital gain as either long-term or short-term depending on the length of time you hold or own the stock before selling it.
In the context of stock ownership, your holding period is the length of time you own a security. If you own a stock for a period of one year or less, you record a short-term capital gain when you receive more than your basis in the stock when you sell the security. If you hold a stock for more than a year, you report your profit from the sale of the security as a long-term capital gain.
If you assume ownership of a stock by purchasing it, the IRS typically views your basis in the stock to equal the amount you paid for the security including commissions and transaction fees. If you acquire a security in another manner, the IRS determines your basis in the stock by how you came to own the stock. If you inherit stock from a deceased relative, for instance, the IRS does not view what your relative originally paid to purchase the stock as your basis in the security. Instead, the IRS considers your basis in the inherited stock to equal what the stock’s fair market value was on the day your relative passed. The amount you receive in exchange for your stock that exceeds your basis in the security equals your capital gain.
Short-Term Capital Gains Tax
The IRS applies an ordinary income tax to the short-term capital gains you record on your federal tax return. Ordinary income tax rates currently range from 10 percent to 35 percent. The rate the IRS applies to your short-term capital gains depends on the amount of income your report on your tax return. If you are single and record an income of $8,500 or less, the IRS taxes your gain at a rate of 10 percent. If your reported income is equal to or between $83,601 and $174,400, on the other hand, the IRS applies a 28 percent tax to your short-term capital gains. The IRS taxes your gains at a rate of 35 percent if your income is above $379,150.
Long-Term Capital Gains Tax
As of the date of publication, the IRS taxes your long-term capital gains at a rate equal to or between 0 percent and 15 percent. The IRS determines your long-term capital gains tax based on the tax rate the IRS applies to your ordinary income. If the IRS taxes your ordinary income at a rate of 35 percent, for example, the IRS applies a 15 percent tax to your long-term capital gains. If your income tax rate is 10 percent, the IRS taxes your long-term gains at a rate of 0 percent.
- Bargaineering: Official 2011 U.S. Income Tax Brackets (IRS Tax Rates); Jim Wang; January 2011
- The Finance Buff: 0 Percent Capital Gains Tax Rate for 2011 and 2012
- Charles Schwab: Breaking Even -- Short-Term vs Long-Term Capital Gains
- IRS.gov: Topic 409 -- Capital Gains and Losses
- IRS.gov: Topic 703 -- Basis of Assets
- IRS.gov: Ten Important Facts About Capital Gains and Losses
- IRS.gov: Investment Income and Expenses
- IRS.gov: Sales and Other Dispositions of Assets
About the Author
Deborah Barlowe began writing professionally in 2010. Earning securities and insurance licenses and having owned a successful business, her articles have focused predominantly on finance and entrepreneurship. Barlowe holds a bachelor?s degree in hotel administration from Cornell University.