Schedule D Tax Tips for Investors

 By William Perez, About.com Guide


Every year, clients come to me with all their brokerage statements asking me to figure out their capital gains on the Schedule D. This can be a time-consuming task. But here's some tips for staying organized and keeping track of your investments.
First things first. Let's start with the whole concept of capital gains. A capital gain is the difference between what you paid for an investment and what you received when you sold that investment. If you made a profit on the investment, then you have a capital gain. If you lost money on the investment, then you have a capital loss.
Long-Term and Short-Term Investments
You are taxed only on the profits you make. You are never taxed on your original investment (that money was already taxed when you earned it). The tax rate on your profits depends mostly on how long you have owned the investment. This is called the capital gains holding periods. There are two holding periods: short-term and long-term. Short-term means you have owned the investment for one year or less. Long-term means you have owned the investment for more than one year. What if you owned the investment for exactly one year? That's considered a short-term investment.
Getting Organized
The biggest challenge most investors (and tax accounts) face is organizing investment activity so that gains and losses can be calculated properly. Here's what you need to do.
Gather together all your brokerage statements, including any trade confirmations or a year-end statement detailing all your investment activities. Normally, I encourage my clients to keep track of their investments throughout the year, using personal finance software or a spreadsheet. There are online tools for tracking your investments too, such as the Gainskeeper web-software.
Figuring Your Profits
You need to calculate your cost basis and selling price in order to calculate your capital gain. Your cost basis is what you paid to buy the stock or other investment. Your selling price is what you sold the stock at. So let's say you bought 100 shares of XYZ stock at $4 per share and paid a $25 commission. You held the investment for two years, and sold the stock at $8 per share and paid a $25 commission to sell the stock. Your cost basis is calculated as follows:

• Purchase price (cost per share times number of shares): $4 x 100 = $400.
• Plus purchase costs (commissions): $400 + $25 = $425.
• Plus selling costs (commissions): $425 + $25 commission = $450.

Your selling price is easier to calculate. Simply multiply the price you sold the stck at times the number of shares. In our example, this is $8 per share times 100 shares, or $800.
Now, we can calculate the capital gains. Capital gains is the selling price minus the cost basis. In our example, the selling price is $800 and the cost basis is $450. So the capital gains is calculated as follows: $800 - $450 = $350.
Tax is calculated on total capital gains for the year. So investors need to tally up the gains or losses on all their investment activity for the year.
If you can organize this using a spreadsheet format, then transferring the information to a Schedule D is easier.
Learn More About Capital Gains
Capital Gains and Losses 101 - from Fairmark.com, an excellent website devoted to the tax aspects of investing.
Gainskeeper - from CCH, a web-based software program for tracking investments and capital gains.
Instructions for Schedule D - from IRS.gov
All About Stocks, Bonds, Mutual Funds, and Investing - from About.com
This new software package is very easy to use (it matched trades and generates a schedule D in literally two clicks). Having tried a few different solutions, I can say this one works well. The price is very reasonable as well, without any limitations on number of trades