Use Technology to Measure Your Capital Gain from Online Investing
Taxes can have a dramatic effect on your online investing success, so you need to be aware of the rules. Most online brokerages won’t stop you from placing a trade that could hurt you when tax time rolls around. It’s up to you to manage your tax picture. And it’s also up to you to track your capital gains.
You might think “Easier said than done,” but keeping track of your capital gains isn’t that complicated. Essentially, if you know the following about all your investment transactions, you have what you need to keep tabs on your capital gains:
The date you bought the investment.
The amount you paid to buy it, which is known as your cost basis. You can calculate this by multiplying the stock price you paid times the number of shares you bought and then adding the commission you paid for the stock trade. All that added together is your cost basis.
For example, say you bought 100 shares of ABC Company for $50 and paid a $5 commission. Your basis is $5,005. You get that by multiplying the cost of the stock by the number of shares ($50 times 100 shares) and then adding the $5 commission.
The date you sold the investment.
The amount you received for selling it, or your proceeds. You can calculate this by multiplying the stock price you sold at by the number of shares you sold, minus the commission you had to pay.
Imagine now that you sold your 100 shares of ABC Company for $100 apiece and paid a $5 commission. The amount of your proceeds is $9,995. You get that by multiplying the price of the stock by the number of shares ($100 times 100 shares) and then subtracting the $5 commission.
At tax time, you must then report all your capital gains on Schedule D. For more help on this, check out what the IRS says about sales and trades of investments.
Because you’re an online investor, you’re probably loath to actually use a pencil and paper to keep track of all this information. Luckily, you have several alternatives:
Personal finance software: Intuit’s Quicken keeps track of everything you need to file Schedule D. It can also transfer all the data the government requires directly into tax-preparation software, such as H&R Block’s TaxCut or Intuit’s TurboTax. Quicken can also print out a capital gains worksheet that you can give to your tax preparer.
Portfolio-tracking sites: Several of the web-based portfolio-monitoring sites can help you track everything you need to calculate your taxes.
Online brokers’ websites: Such sites often track when you bought investments, how much you paid, and when you sold them. Nearly all online brokerages have a place on their websites where you can see your realized and unrealized gains. And at the end of the year, online brokerages provide a document that shows all your trades and your bases in many cases.
If you bought a stock in 2011 or later, it’s your brokerage’s responsibility to track your cost-basis information and report it to you at tax time. This is a big change for investors and it eliminates the hassle of tracking cost basis for any recently purchased stock. But the change also means your relationship with your brokerage is even more important.
Online capital gains calculators and sites let you enter your stock buys and sells and help calculate your net capital gains or losses and carryovers. One example of an online capital gains calculator is the one at MoneyChimp.
Specialized online sites dedicated to optimizing your tax strategy might make sense if you have a particularly complicated situation. For instance, GainsKeeper is a professional-level online service that helps you track your trades, tally your cost basis in stocks, and find ways to reduce your taxes. (The figure shows the GainsKeeper site.)
If you’re an extremely active trader, the tax rules and keeping track of everything can get complicated, so software like this can be helpful. The system isn’t free; it’ll cost you at least $70 a year. Before signing up, though, check with your broker — some offer discounted subscriptions. Or some brokers, including TD Ameritrade, offer free access to GainsKeeper.GainsKeeper is a dedicated website that helps you find ways to optimize your tax strategy when it comes to investing.