To calculate the gains or losses on a stock investment, one must first know the cost basis, which is the purchase price initially paid for the stock. Investors who neglected to record this information may find it on the order execution confirmation form or the brokerage count statement, from the date of the purchase. Once investors learn the purchase price, they must next consider the stock's selling price, which may likewise be sourced from the same documents.
Calculating the gains or losses on a stock investment involves the following multi-step process:
- Determine the cost basis, which is the purchase price initially paid for the stock.
- Recognize the selling price.
- Calculate the difference between the purchase price and the sale price to determine the gains or losses per share.
- Multiply gains or losses per share, by the number of shares.
The difference between the purchase price and the sale price represents the gain or loss per share. Multiplying this value by the number of shares yields the total dollar amount of the transaction. Investors who wish to determine a more accurate number may also factor in any brokerage commission fees related to the purchase or sale of the stock.
Investors must then consider the tax consequences of the investment, which kicks in if the stock was housed in a non-retirement account. Under the current U.S. tax code, if investors hold the stock for less than one year, the capital gain/loss will be deemed short term and will consequently be calculated as ordinary income for tax purposes. But if a profitable stock is held for more than one year, it will be subject to the standard capital gains tax of 15%.
Consider the following scenario: Suppose you buy 100 shares of XYZ stock on August 1, 2016, for $20 a share. Let's further assume you sell 50 shares of this stock on September 1, 2017, for $25 a share. On a per-share basis, the long-term gain would be $5 per share. Multiplying this value by 50 shares yields $250. Then multiplying that number by the 15% capital gains yields $37.50, which would be the tax consequences for this transaction.
If a stock splits, investors must adjust their cost price accordingly. For example, if the stock purchase price was $25, and it splits 2 for 1, the cost basis would be adjusted to $12.50 per share.
Tom Cymer, CFP®, CRPC®, CFA
Opulen Financial Group, LLC, Arlington, VA
The first step in calculating gains or losses is to determine the cost basis of the stock, which is the price paid, plus any associated commissions or fees. For example, assume you bought 10 shares of XYZ stock at $100 a share, for $1,000, and paid a $50 commission to your broker. In this case, the total cost basis is $1,050. Dividing $1,050 by 10 (the number of shares owned) equals the cost basis per share. Next, you must adjust your basis for any stock dividends that were reinvested. Let's assume your stock paid $100 in dividends, which you then paid tax on via Form 1099-DIV. You can now adjust your basis upwards: $1,050 + 100 = new basis of $1,150. The difference in proceeds from the sale will be your gain or loss.