When you sell an investment, the difference between what you paid (your cost basis) and what you received is a capital gain or loss. Your brokerage reports this to you — and to the IRS — on Form 1099-B.
Short-term vs. long-term
Hold an investment for a year or less and gains are taxed as ordinary income. Hold it longer and gains qualify for lower long-term capital gains rates. The calendar often matters more than the trade.
Losses are useful
Capital losses offset capital gains, and up to $3,000 of net losses can offset ordinary income each year, with the rest carried forward. Selling losers strategically — tax-loss harvesting — is legal and common; just mind the wash-sale rule, which disallows the loss if you repurchase the same investment within 30 days.
Do not estimate your basis
The IRS receives a copy of your 1099-B. Returns that do not match it generate automated notices. Always work from the actual form, including any corrected versions your brokerage issues in February or March.
Your situation
General information only — your return may differ. If this article sounds like your situation, let's look at it properly.
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