Schedule D - Capital Gains and Losses
When a taxpayer sells stock they report the transaction on Schedule D: Capital Gains and Losses. If you sell the stock for more than what you purchased it for you have a gain. If you sell the stock for less than what you purchased it for you have a loss.
There are two types of capital gains: long-term, and short term. Long-term capital gains receive special tax treatment; they are taxed at a lower rate than your ordinary income. However, in order to receive this special tax treatment you must hold onto the stock for more than a year. Short-term capital gains receive no special tax treatment are and taxed at your ordinary income rate.
You may sell stock at a loss and those losses can be used to offset gains over the course of the year. For example, if you have $3,000 of gains and $2,000 of losses then your net gain reported on your tax return is $1,000. The amount of losses you can deduct in a given year are limited to $3,000. For example, if your net loss is $5,000 then you can deduct $3,000 in the current year and carry the remaining $2,000 loss forward into future years.
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