Understanding Capital Gains and Cost Basis

Understanding Capital Gains and Cost Basis


Every time you sell an investment, you’re required to report any capital gains or losses you have incurred from the transaction. This included any “cost basis” information related to that stock.

Cost basis is the price you paid for the purchase of a stock or any other security, as well as any additional costs. This includes any commissions you paid to your broker. The amount it cost to buy the security is figured into the taxable amount that resulted from the sale; and if it sold for more than what you originally paid, the difference is taxed as a capital gain.

The gains are taxed at the day of the sale, unless it’s associated with a “tax-advantaged” account. Otherwise, they are incurred when the money is withdrawn.

Capital Gains Tax Rates


Capital gains are taxed at a different rate than regular income tax, and it depends on your income bracket. It also depends on how long you’ve had the stock in your portfolio. If you had it for more than a year, it’s considered to be a long-term capital gain, and they are subject to capital gains tax. Short-term capital gains are taxed as ordinary income.

Capital losses can also be used to offset any capital gains, and you can deduct up to $3000 every calendar year.

How Cost Basis is Calculated


There are two methods for calculating cost basis:

  • Average Cost Method–You take the total cost of the shares and divide it by the number of shares
  • Actual Cost Method – You take the actual purchase price of each share

Each one has its own advantages and disadvantages, so be sure to speak to a tax professional to see which one works best for your situation.

How Capital Gains Are Reported


Any capital gains or losses must be reported, and brokers are also required to report any sales information to the IRS by using Form 1099-B. However, new regulations have required additional reporting on different types of investments. Any stocks that have been purchased on or after 2011 must report any cost basis information, and you will be required to file a Schedule B on your tax return. Sales transactions must also be reported on Form 8949.

Finding a Tax Professional


If you’ve earned capital gains from the sale of stocks or other securities, you want to make sure you’re reporting them properly, which is why you need to find a tax professional to help you. Tax laws change every year, and a tax expert will have a more thorough understanding of current regulations.

You will find that not all tax professionals are the same. They all have different areas of expertise, which is why it’s important to find the right person to handle your specific situation. Tax accountants can help you file your return, but they won’t be able to represent you in a legal issue. Tax attorneys are better suited for this role, because they’re trained to handle these types of situations.

Tax attorneys will be able to represent you in a Court of Law, but it’s important to find the right one. They also have different areas of expertise, so you need to ask them the right questions. Be sure to ask them about their experience, and you should find out if they have handled cases like yours. Doing so will save you a lot of time and money. Not to mention, your level of stress.

Tax Law Tampa has a team or expert tax attorneys who will make sure you’re in compliance when you put together your tax return. We can also give you counsel if a legal issue should arise in the future. Tax issues should never be ignored, because it could make things worse for you down the road. That’s why you need to find a qualified tax attorney as soon as possible.

We will sit down with you, and we will take a look at your situation. Then, we will come up with a workable solution that will put those problems to rest. You can’t afford to wait, as it could lead to added liabilities later on.

To find out more about how we can help you, get in touch with us today!



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