How to calculate capital gains from U.S. stocks

Getting into the U.S. stock market can feel overwhelming at first. But understanding how capital gains work is crucial for your investment success. Let's break down everything you need to know about calculating capital gains from U.S. stocks.

What are capital gains?

Capital gains represent the profit you make when you sell a stock for more than you paid for it. Think of it as the difference between your buying price and selling price. If you bought Apple stock at $100 and sold it at $150, your capital gain is $50 per share.

The U.S. stock market generates trillions in capital gains each year. Every time you sell a profitable investment, you create a taxable event. The government wants its share of your profits through the capital gains tax.

Understanding the basics of capital gains calculation

Calculating capital gains from U.S. stocks involves a simple formula:

Capital Gains = Selling Price - Purchase Price - Transaction Costs

Let's say you bought 100 shares of Microsoft at $200 per share. You paid $20,000 plus $10 in broker fees. Later, you sold those shares at $250 each for $25,000 minus $10 in selling fees.

Your calculation would be:

• Selling price: $25,000 - $10 = $24,990
• Purchase price: $20,000 + $10 = $20,010
• Capital gains: $24,990 - $20,010 = $4,980

Short-term vs long-term capital gains

The U.S. stock market treats capital gains differently based on how long you hold your investments. This timing makes a huge difference in your tax bill.

Capital gains short-term

Short-term capital gains apply when you sell stocks within one year of buying them. These gains face ordinary income tax rates, which can be as high as 37% for high earners.

Example: You buy Tesla stock in January and sell it in November of the same year. Any profit counts as short-term capital gains.

Capital gains long-term

Long-term capital gains kick in when you hold stocks for more than one year. These enjoy much lower tax rates: 0%, 15%, or 20% depending on your income level.

Example: You buy Amazon stock in March 2023 and sell it in April 2024. Since you held it for over a year, you qualify for long-term capital gains treatment.

Capital gains tax rates explained.

Understanding capital gains tax rates helps you plan your investment strategy better. The rates vary significantly between short-term and long-term holdings.

Short-term capital gains tax rate

Short-term gains face the same rates as your regular income:

• 10% for income up to $11,000 (single filers)
• 12% for income from $11,001 to $44,725
• 22% for income from $44,726 to $95,375
• 24% for income from $95,376 to $182,050
• 32% for income from $182,051 to $231,250
• 35% for income from $231,251 to $578,125
• 37% for income over $578,125

Long-term capital gains tax rate

Long-term rates are much more favourable:

• 0% for single filers with income up to $44,625
• 15% for income from $44,626 to $492,300
• 20% for income over $492,300

Step-by-step calculation process

Let's walk through a complete example to show you exactly how to calculate capital gains from U.S. stocks.

Step 1: Determine your cost basis

Your cost basis includes the purchase price plus any fees or commissions. If you bought stocks at different times, you need to track each purchase separately.

Example: You made three purchases of Google stock:

• January: 50 shares at $120 each = $6,000
• March: 30 shares at $130 each = $3,900
• June: 20 shares at $140 each = $2,800
• Total cost basis: $12,700 for 100 shares

Step 2: Calculate your proceeds

When you sell, subtract any selling fees from your gross proceeds. If you sold 40 shares at $160 each, your gross proceeds would be $6,400. After a $15 commission, your net proceeds equal $6,385.

Step 3: Determine which shares you sold

The IRS uses the "first in, first out" method unless you specify otherwise. For our example, selling 40 shares means you sold:

• 40 shares from your January purchase at $120 each
• Cost basis for these shares: 40 × $120 = $4,800

Step 4: Calculate your gain or loss

Capital gains = Net proceeds - Cost basis Capital gains = $6,385 - $4,800 = $1,585

Step 5: Determine the holding period

Since you bought in January and sold later in the year, this counts as short-term capital gains. You'll pay ordinary income tax rates on the $1,585 profit.

Advanced considerations for U.S. stocks

Dividend reinvestment plans

Many U.S. stocks offer dividend reinvestment plans (DRIPs). When dividends buy additional shares, those shares have their cost basis equal to the stock price on the reinvestment date.

Stock splits and dividends.

Stock splits and stock dividends affect your cost basis. If you own 100 shares at $50 each and the stock splits 2-for-1, you now own 200 shares with a cost basis of $25 each.

Wash sale rules

The wash sale rule prevents you from claiming losses if you buy substantially identical securities within 30 days before or after the sale. This rule can complicate your capital gains calculations.

Record keeping for capital gains

Proper record keeping makes capital gains calculation much easier. Track these details for every U.S. stock transaction:

• Purchase date and price
• Number of shares bought
• Brokerage fees and commissions
• Dividend reinvestment details
• Sale date and price
• Selling fees

Many brokerages provide year-end tax documents that summarise your capital gains and losses. However, you should still maintain your records for accuracy.

Tax planning strategies

Understanding capital gains tax helps you make smarter investment decisions in the U.S. stock market.

Tax-loss harvesting

You can offset capital gains with capital losses. If you have $5,000 in gains and $2,000 in losses, you only pay tax on $3,000 in net profits.

Holding period optimisation

Consider holding profitable investments for over one year to qualify for lower long-term capital gains rates. The tax savings can be substantial.

Retirement accounts

Contributing to 401(k)s and IRAs lets you invest in U.S. stocks without immediate capital gains tax consequences. You defer taxes until retirement, when you might be in a lower tax bracket.

Common mistakes to avoid

Many investors make costly errors when calculating capital gains from U.S. stocks:

• Forgetting to include transaction costs in calculations
• Mixing up short-term and long-term holding periods
• Not tracking the cost basis properly for partial sales
• Ignoring wash sale rules
• Failing to consider state taxes on capital gains

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Working with tax professionals

Complex investment portfolios often require professional help. Consider consulting a tax advisor if you:

• Trade frequently in the U.S. stock market
• Have significant capital gains or losses
• Use advanced strategies like options or short selling
• Need help with tax planning optimisation

Calculating capital gains from U.S. stocks becomes easier with practice and proper record-keeping. Start with simple buy-and-hold strategies while you learn the ropes. As your portfolio grows, you can explore more advanced techniques to minimise your capital gains tax burden while maximising your investment returns. Remember that tax laws change frequently, so stay informed about current rates and regulations that affect your U.S. stock investments.

Frequently asked questions about capital gains?

1) How do you calculate capital gains on US stocks?

• Capital Gains = Selling Price – Purchase Price – Transaction Costs

• Example: Bought at $100, sold at $150, $5 fees on each side →

  ($150 - $5) - ($100 + $5) = $35 per share

2) How do I calculate capital gain tax on US stocks in India?

• Convert gains to INR using the RBI rate on the sale date
• Long-term (held >24 months): 20% tax with indexation
• Short-term (≤24 months): taxed as regular income
• Claim credit for US taxes paid

3) Is there a capital gains tax on U.S. stocks?

• Yes. US taxes gains when you sell for a profit
• Short-term (≤1 year): taxed as income
• Long-term (>1 year): taxed at lower rates

4) What is the capital gains tax rate on stocks in the US?

• Short-term: 10%–37% (your income tax rate)
• Long-term: 0%, 15%, or 20% (most pay 15%)

Disclaimer: This content is for informational purposes only and does not constitute tax or investment advice. Consult a professional.

Contributed by Denila Lobo

Denila is a content writer at Winvesta. She crafts clear, concise content on international payments, helping freelancers and businesses easily navigate global financial solutions.