High Income View:
Figuring Out Your Capital Gains on Stock Sales
Come tax season, investors from around the country need to take out their records of shares and the prices they bought them at to figure out the tax they would pay on them. It's simple if all your stocks were bought at the same time and same price, but if you have a diverse portofolio, you need to be very careful. For the shares you sell, you need to have an idea on how to report them on your tax return. The following are methods that you can use (the IRS aleady does!)to figure out your capital gains:
- Investors who act smartly and control the sale of their stocks through a broker or mutual fund can take advantage of the specific identification method. Under this method you pay the lowest possible capital gain tax because you can advise the broker to get rid of the ones that will yield you the greatest gain over time. It's also smart to take into account how long you have had share, because after 18 months, you usually pay the lowest capital gains tax possible.
- For those investors that didn't take the above route and now don't have any idea on which sales to report to the IRS, you can take advantage of the averaging method. The gains are based on the average cost of all the shares in the fund. This produces a slightly higher gain tax.
- The one method the IRS loves to use when you don't take advantage of either of the first two methods either due to bad record-keeping or because you did not know about them, is the first in, first out method. Under this method IRS chooses which shares were sold at the lowest possible prices hence yielding the highest possible gain.