How does Capital Gains Tax work?

Question

I am a student with no income other than investing, and I am curious how capital gains taxes work. Say I started the year with 10,000 invested, and through many trades, within that year, I end up with 15,000 in my account. Am I charged the capital tax on every single trade, or is it just charged on the final profit amount of $5,000? Also, If i have no income other than investing, and my profit falls under the federal exempt tax status, do I still have to pay capital gains tax? One more thing, what is the name of the form to fill out capital gains taxes? Thanks!

Does my broker keep track of all my trades? I have no idea how many i have made, however I am up 28%!

So there is a capital gains tax for state on top of the federal?

Answer 1

You have to report all of the trades that you made, with their sales price, basis, dates of purchase and sale, and show the gain or loss on that trade. You split out long term (items held for at least a year and a day) from short term (held a year or less).

You net all of the trades together and just pay tax on net gain. Long term gets a break in tax rate over short term gains.

If your total income for the year is $5000, all from stock trades, then no, you wouldn't owe any tax on it.

The form you'd need is Schedule D with a 1040.

And yes, your broker keeps track of all the trades, and will send you a statement at the end of the year showing them all. If you purchased all of the stocks through the broker, and the broker holds them for you, most brokers will give you a statement showing all of the info you need for the schedule D including the purchase info.

Answer 2

You would be charged capital gains tax on only the gain, which in your example would be $5,000, and if your income is less than your standard deduction and your personal exemption (if your parents don't claim you) then no, you wouldn't have to pay capital gains tax. The name of the form to fill out capital gains taxes is Schedule D. You do have to put down each sale that you do, and you would put down the name of the stock, the date purchased, the date sold, the amount received from the sale, the amount it cost to buy it, and your gain or loss. Just to let you know, you need to hold a stock for 1 year for any gain or loss to be long-term, and less than 1 year for gain or loss to be short-term. Inherited stock is always treated as long-term. Also, if you have gains you are taxed on the entire gain, but if you have losses, you can only take losses up to $3,000 per year ($1,500 if married filing separately) and the remainder you can carry forward unless used up. States treat capital gains and losses differently than the federal. Pennsylvania for example doesn't allow losses, except to offset them against gains, and doesn't let you carry losses forward. Massachusetts lets you offset losses against gains, and also against dividends but only to the amount of $2,000 but they do let you carry the unused losses forward to use in the future.