How Capital Gains Tax Is Calculated

Adjusted cost basis is your tax investment in an asset. It begins with the original purchase price and is increased by purchase commissions, certain acquisition fees, and other capitalized costs, then reduced by return-of-capital distributions and applicable prior adjustments.

For example, if you bought 100 shares at $50 each and paid a $25 commission, your initial basis is $5,025. If the company later returned $0.50 per share as a non-taxable return of capital, the basis would decrease to $4,975. Reinvested dividends generally create new tax lots with their own acquisition dates and basis; they do not simply add to the original lot's basis.

The amount realized is what you actually received from the sale, reduced by direct selling costs. If you sold for $8,500 and paid a $25 brokerage commission on the sale, your amount realized is $8,475.

Do not subtract selling expenses that are already reflected in the proceeds reported on Form 1099-B. Deducting the same expense twice overstates the reduction.

Capital gain or loss equals the amount realized minus the adjusted cost basis. Using the examples above: $8,475 amount realized minus $4,975 adjusted basis equals a $3,500 capital gain.

If adjusted basis exceeds the amount realized, the result is a capital loss. A capital loss can offset capital gains and, within limits, reduce ordinary taxable income.

Counting begins the day after you acquired the asset. The sale date is included. An asset sold exactly one year after purchase is still short-term; it must be held more than one year to qualify as long-term.

Short-term gains are taxed as ordinary income through the standard federal brackets — the same brackets that apply to wages. Long-term gains from most investment assets may qualify for lower preferential rates.

Short-term gains are added to other ordinary income and taxed through progressive brackets. Different portions can fall in different brackets, so the gain is not taxed at a single flat rate.

Long-term gains use the stacking method: ordinary taxable income fills the lower bands, then qualified dividends and long-term gains are stacked above. The 0% rate applies to the gain that fits within the available space below the 0%–15% threshold; the 15% rate applies to the next portion; the 20% rate applies to any remaining gain.

Use the Capital Gains Tax Calculator to estimate your short-term or long-term federal capital-gains tax, Net Investment Income Tax, and net proceeds. Enter your purchase price, sale proceeds, dates, filing status, and other income.