- When investing money, you will owe taxes on realized capital gains. Realized capital gains occur when you sell an investment at a profit. As of 2010, realized capital gains are categorized as short-term and long-term capital gains for tax purposes. Short-term capital gains are taxed at ordinary income rates of 10, 15, 25, 28, 33 and 35 percent. Long-term capital gains receive favorable tax treatment and are either tax-free or taxed at maximum 15 percent rates. For long-term capital gains, you must hold an investment for more than one year before selling it off.
- At tax season, you will receive 1099 forms from your brokerage, which document your investment activity. With this information, you can complete IRS Schedule D and 1040 to report and pay taxes on your investment gains.
- When calculating realized capital gains, you will include brokerage commissions within your cost basis and sales proceeds. Doing so effectively deducts investing costs away from your taxable income. For example, you may make investments through an online brokerage that charges $7 for each trade. If you bought 100 shares of Corporation K in May at $50 per share, you would report a cost basis of $5,007--$100 x 50 = $5,000 + $7 brokerage commissions = $5,007. That July, you cold your Corporation K position for $60 a share. Your sales proceeds would then be $5,993--$100 x 60 = $6,000 - $7 brokerage commissions = $5,993. For Corporation K transactions, you would owe taxes on $986 worth of short-term realized capital gains.
- In the same fashion as realized capital gains, you will include brokerage commissions within your cost basis and sales proceeds figures when you calculate realized capital losses. You may deduct a maximum of $3,000 in realized capital losses from your taxable income. Realized capital losses that exceed $3,000 may be carried forward and deducted in subsequent tax years. You should also recognize that the IRS prohibits wash sales--for the sake of realized capital loss write-offs. A wash sale occurs when you sell an investment at a loss, and buy back that same investment within the next 30 days.
- You ultimate investment strategy should focus upon generating the highest returns for the least amount of risks. Balancing risks versus rewards does not always translate into a minimal tax bill. For example, you should not trade frequently--with the sole intent of incurring a large amount of deductible brokerage commissions. You may miss out on solid long-term gains due to excessive, short-term trading.
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