Even though the market flat-lined in 2005, you still may have a capital gains tax bill on your return this April. Gotta love that. No growth -- just taxes. Yippee. So if you sold a stock or got a dividend distribution, expect to owe tax. Remember, Uncle Sam always gets a cut. And while you probably just want to close the book on your once-darling stock that's now worthless, you may be able to declare a loss on that holding and offset all the other taxes you're going to owe. So let's tackle these seemingly unfair issues and hopefully save you some money in the process.
A Capital Refresher
If you sell a security for more than you paid, you'll owe capital gains tax on the difference. To calculate that difference, be sure to include your commission fees. Any commissions paid to purchase the shares is added to your basis, or purchase price. So if you bought $100 worth of stock and paid a $5 commission to get those shares, your basis is $105. Let's say you sold those shares for $125, 13 months later. If you paid another $5 to make the trade, your proceeds are $120. That makes your total gain -- or profit from the transaction -- $15 ($120 - $105). This transaction should be reported on Schedule D -- Capital Gains and Losses and you'll owe capital gains tax on the profit. The rate you owe will depend on how long you held the shares. If you held the shares for more than a year before you sold them, you'll qualify for the long-term capital gains rate, which is 15% (5% if your ordinary income tax bracket is 15% or lower). That's the rate you'll use for the long-term sale of stocks, mutual funds, or even ETFs.