Amazing Video on Sell Stocks Taxes.

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Hope you enjoyed that video. Here is some Interesting Reading.

Calculate the investment basis correctly or end-up paying double tax!

When you purchase a stock, the broker gives you an advice mentioning the cost.  Then it is a straight transaction and there is no problem while calculating the basis when you make the sale.  You take the purchase price as the basis and calculate capital gain or capital loss.

However, things are tricky when you reinvest in stocks.  In this case the calculation of profit or loss on sale of stock reinvested is slightly complicated.

Suppose you purchased 500 shares of a stock for $2,500 in 2006.  You received a dividend of $200 in the same year and that dividend was reinvested. You received another dividend of $300 in the year 2007 and that was reinvested.  In the year 2008, you sold all your stock for $3,300.  Here, the basis of your investment is $3,000 (and NOT $ 2,500) and you should pay taxes on the capital gain of $300.  You have already paid taxes on dividends received in 2006 and 2007 and these amounts should be added to the basis while calculating your capital gain.

IRS considers reinvested earnings as paid to you, though you never had this cash in your hand.  These earnings are supposed to be ‘constructively received’ by you meaning you could have taken the cash if you opted for it.  These earnings have already been reported on Form 1099–DIV and you must have paid taxes on them in the year of their receipt.

If you are not careful, you may not account for the reinvested distributions and end-up donating Uncle Sam as tax for the second time on the same money!

The same principle applies for calculating your losses.  If you have made a loss, it can be used to reduce other gains.  However a wrong calculation of the basis would prevent you from taking the full benefit.

To continue with the same example, if you sold that stock for $2000, you are making a loss of $1000 (not $500 which will be apparent from the normal calculations).  This extra loss can make a substantial difference in your final tax payment.

You need not overpay IRS on your investment gains or losses.  So you need to preserve all your account statements in order to make correct calculations.  The statements will also show you the payment of any fees or charges to acquire or sell stock.  These amounts are not deductible from your income, but they are useful to calculate the basis.

To maintain this paperwork you need a little extra effort.  But it can definitely put extra money in your pockets.

About the Author

Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of personal finance. His famous eBook Stop donating your money to IRS which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax.

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