It’s my annual “Taxes from A to Z” series! If you’re wondering whether you can claim home office expenses or whether to deduct a capital loss, you won’t want to miss a single letter.
Y is for Yo-Yo Market.
A yo-yo market is a term used to describe the stock market when it’s being volatile. You know the drill: One day the market is up by hundreds of points, the next day, it’s down. But every time the market dips, that doesn’t equal a real, or realized loss. Similarly, when the market goes back up, that doesn’t equal a real, or realized gain.
To realize a gain or a loss for tax and accounting purposes, you have to do something with the asset. Typically, that means that you sell it or otherwise dispose of it. In other words, gains and losses aren’t measured moment to moment but from the time you acquired the asset to the disposition of the asset.
To figure your gain or loss, you need to know the basis. Basis is, at its most simple, the cost that you pay for assets. The actual cost is sometimes referred to as “cost basis” because you can make adjustments to basis over time. When it comes to stocks, your basis is generally equal to the original cost of the shares; if you participate in a DRIP or other reinvestment plan, your basis is your cost plus the cost of each subsequent purchase/reinvestment subject, of course, to other adjustments for splits and the like. When you dispose of the asset at sale or transfer, called a taxable event, the value of the stock or asset at that moment is what matters. It doesn’t matter if the stock went up and down a hundred times in the middle. Your realized gain or loss is figured by calculating the difference from purchase (plus adjustments) to sale. All that stuff in the middle is, for tax and accounting purposes, just a bunch of squiggly lines.
At tax time, you’ll report your realized gains and losses on a Schedule D, Capital Gains and Losses, (downloads as a pdf) and then transfer the results to the front page of your federal form 1040. You don’t file a Schedule D if you don’t have any realized gains or losses. Even if the value of your shares went up and down significantly, if there’s no sale or disposition, there’s nothing to report.
If your realized gains exceed your realized losses, you have a capital gain. The rate will be dependent on whether those gains or losses are long-term or short-term. If you hold the shares for one year or less and then sell or otherwise dispose of the stock, your capital gain is considered short-term. Short-term gains are generally taxed at your ordinary income tax rate. If you hold the shares for more than one year before you get rid of them, your capital gain is called long-term. Long-term gains are subject to more favorable rates.
If your realized losses exceed your realized gains, you have a capital loss. The amount of your capital loss offsets your taxable income for the tax year, subject to certain limits. If your losses exceed those limits, you can carry the loss forward to later years (some other limits and restrictions may apply).
Capital gains and losses can be confusing. But let’s not make them more confusing than they need to be. In a yo-yo market, your portfolio may go up and down but unless you’re trading or selling off, you’re not actually realizing those losses for tax purposes.
For your taxes from A to Z, here’s the rest of the series:
- A is for Annual Contribution Limits
- B is for Bonus
- C is for Choate
- D is for Direct Deposit
- E is for Enrolled Agent
- F is for Found Money
- G is for Ghost Preparer
- H is for Hobby Loss Rules
- I is for Installment Agreement
- J is for Joint Accounts
- K is for Kin (Crypto)
- L is for Line of Credit
- M is for Mileage
- N is for NIIT
- O is for Organ Donations
- P is for Private and Parochial Schools
- Q is for Qualifying Relative
- R is for Relief Funds
- S is for Surviving Spouse
- T is for Taxpayer Bill of Rights
- U is for Unused Sick Leave
- V is for Voluntary Bankruptcy
- W is for W-9
- X is for XE.com