Prepare Your Spreadsheet and Be Ready ...
Cost basis is the original price of an asset, such as stocks, bonds, mutual funds, property, or equipment. Cost basis includes the purchase price and any associated purchase costs. Additional purchase costs included in cost basis are shipping, sales tax, installation costs, commissions and fees on the purchase, and certain tax-related adjustments. Cost basis may increase or decrease because of tax-deferred gains or tax-deferred losses.
Capital gains are profits you earn through buying and selling capital assets. Capital assets include things such as stocks, mutual funds, bonds, real estate, precious metals, coins, fine art, and other collectibles. Wages, interest, and dividends are considered ordinary income, not capital gains income. Many people invest in stocks, bonds, and mutual funds through a tax-deferred retirement account. Individual Retirement Accounts (IRA), Roth IRA, and 401(k) plans are examples of tax-deferred accounts. Your investment profits in tax-deferred accounts are not reported as capital gains. Instead, income from these accounts is tax-deferred until the money is withdrawn, and then the income is taxed as ordinary income. (Withdrawals from a Roth IRA may be tax-free if you meet certain requirements.)
Calculating Capital GainsYou calculate profits or losses on each investment you make. Here's the formula for calculating your profit or loss on a single investment:
Profit (or Loss) = Selling price - Selling fees & commissions - Buying fees & commissions - Purchase priceYou need to fill
Form 1040 Schedule D for your capital gain each year, however there's no place to put information about fees and commissions. So the easiest thing to do is to add all commissions, fees, and the purchase price together into one figure called "
cost basis." Cost basis is calculated as follows:
Cost Basis = Purchase price + Purchase commissions & fees + Selling commissions & feesAnd that gives us a simple capital gain formula:
Capital Gain (or Loss) = Selling Price - Cost Basis
Here's an example of a columns and rows for setting up a very basic capital gains spreadsheet.
| Capital Gains Worksheet |
| A. | Description of Security | | 230 shares ABC |
| B. | Date Bought | | 4/3/2008 |
| C. | Buy Price | | 3120 |
| D. | Buy Commission | | 4.50 |
| E. | Date Sold | | 5/8/2009 |
| F. | Sell Price | | 5680 |
| G. | Sell Commission | | 4.50 |
| H. | Cost Basis | = C + D + G | 3129 |
| I. | Capital Gain | = F - H | 2551 |
| J. | Short-Term or Long Term | | LT |
Capital gain or loss is reported for each transaction. Then your total gains or losses are figured. You will have either a net profit or a net loss from all your trades. There are special rules for
capital losses, such as
annual limitations on capital losses and
Wash Sale Rules.
Tax Treatment Capital GainsCapital gains are taxed differently, depending on what kind of capital asset you invested in and depending on how long you held the asset. The holding period is determined from the date you bought your investment until the date you sold your investment.
The short-term holding period is one year or less. Short-term capital gains are taxed at ordinary income tax rates.
The long-term holding period is more than one year. Long-term capital gains are taxed at discounted long-term capital gains rates. The long-term tax rate will be either 5% or 15%, depending on your marginal tax bracket.
In additional to the federal capital gains tax rates, your capital gains will also be subject to state income taxes. Most states do not have separate capital gains tax rates. Instead, most state will tax your capital gains as ordinary income subject to the state income taxes rates.
Capital Gains Tax Rates- Short-term capital gains (STCG) - One year or less
TAX Rate: Ordinary income tax rates up to 35% - Long-term capital gains (LTCG) - More than one year
TAX Rate: 5% for taxpayers in the 10% and 15% tax brackets (Zero percent 2008-2010)
TAX Rate: 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets - Collectibles - One year or less
TAX Rate: STCG tax rates up to 35% - Collectibles - More than one year
TAX Rate: 28%
Collectibles include the following items: stamps, coins, precious metals, precious gems, rare rugs, antiques, alcoholic beverages, and fine art.
