Capital Gains Considerations
Whenever an investor sells a stock, it becomes necessary to determine if capital gains tax is owed. The amount of capital gain is calculated by subtracting the cost basis of the stock from the sale proceeds. If this amount is positive, there is a capital gain and tax is owed. If there is less than or equal to one year between the purchase and sale, then the gain is considered ordinary income and taxed at the investor’s marginal tax rate. If the period is longer than one year, then the gain is considered a capital gain and is taxed at the capital gains tax rate. Since the passage of the Tax Relief Act of 1997, the capital gains rate has been 20% for those above a 15% income tax bracket. For those with income below the 15% income tax bracket, the capital gains rate is 10% and is lowered to 8% for assets held longer than five years.

Deduct commissions from capital gains tax.
When determining the sales proceeds amount in a capital gains calculation, be sure to deduct brokerage commissions and SEC fees. In determining the initial cost basis for this calculation, be sure to add commissions to the stock’s cost.

Use trade date for capital gains tax.
When calculating the holding period to determine if gains are short-term or long-term, be sure to use the purchase and sale trade dates and not the settlement dates.

Current losses are deductible.
In any tax year the total of capital gains/losses from all transactions are considered together. This means that any losses offset the amount of any gains. Short-term and long-term gains/losses are calculated separately. If the total is positive, then capital gain tax is only owed on the total. If the total is negative, then no tax is owed, and up to $3,000 in losses for those filing jointly ($1,500 separately) can be deducted.

Prior losses can offset current taxable gains.
Any loss that is greater than the allowable annual amount can be carried forward into future tax years to offset gains. So if you have unused losses from prior years, be sure to use them to offset current gains.

Keep an eye to the future.
Starting in 2006 an 18% long-term capital gain rate will replace the 20% rate for assets held longer than five years if they were purchased after 12/31/2000.

Mike Shinn for www.fizone.com

March 2003