Key takeaways
You only pay tax on the profits earned from investments sold.
Make sure to deduct any commissions and fees from your total profit.
Capital gains are taxed at two different rates depending how long you held the investment.
I’d been watching certain stocks rise all year and decided it was time to cash out. But I didn’t want a surprise tax bill waiting for me.
Here’s what many investors don’t realize: You don’t pay capital gains tax on the full sale price.
You only pay tax on your profit — what’s left after subtracting what you paid for the investment (including fees).
If you sell at a loss, you won’t owe capital gains tax — and you may even be able to use the loss to offset other gains.
Calculating capital gains
To calculate your profits, you need to know the stock’s cost basis, which is what you paid after fees and commissions.
For example, if you purchased stock for $10,000 and paid $50 total in fees, your cost basis is $10,050. If you sell it for $20,000, your taxable gain is $$9,950 — not $20,000.
Reinvesting dividends – a smart move to save you money
Reinvesting dividends boosts your cost basis. That can lower your capital gains when you sell — which may reduce the amount you owe.
Let’s say you buy a stock for $500 and reinvest a 6% dividend. After a year, your total investment grows to $530.
If you later sell the stock for $1,500, your taxable gain isn’t $1,000 — it’s:
$1,500 – $530 = $970
Calculating cost basis on your gifted or inherited stocks
Inheriting stocks or receiving securities as a gift can feel like a windfall. But it’s not entirely free money; you still may owe capital gains tax when you sell.
For gifted stock, you typically use the original owner’s cost basis. Inherited stock generally uses the value on the date of death.
Short vs. long term capital gains
One year or less: Taxed at your ordinary income tax rate (10%–37%).
More than one year: Taxed at 0%, 15%, or 20%, depending on your taxable income.Find out exactly what you owe with our free Capital Gains Tax Calculator.
Capital gains tax FAQ
Your cost basis includes what you paid for the stock, reinvested dividends, and applicable fees or commissions. To calculate taxable capital gains, subtract the cost basis from the selling price.
Make sure to report capital gains only on the profits you made, and not on the whole sale price of stock.
To use a capital gains tax calculator, you’ll need your stock’s cost basis, the selling price, and how long you held the investment. The calculator then estimates your tax based on whether your gain is short-term or long-term and your overall taxable income.
For more personalized strategies like tax-loss harvesting, consider TurboTax Experts can tailor a strategy just for you..
