how to calculate capital gains on stocks: step-by-step

How to calculate capital gains on stocks

Introduction / Scope

Understanding how to calculate capital gains on stocks helps investors know when taxes are owed, how much they may owe, and which records to keep. This article explains the mechanics of capital gains calculation for publicly traded stocks under U.S. federal tax rules, distinguishing realized vs. unrealized gains, short‑term vs. long‑term treatment, cost basis adjustments, lot identification methods, reporting requirements, and practical tax‑planning strategies. It also gives brief comparisons to cryptocurrencies and other asset classes and highlights where Bitget services (trading and Bitget Wallet) fit into recordkeeping and execution.

As of 2025-12-31, according to IRS publications and guidance on capital gains, key definitions and reporting obligations remain consistent for publicly traded stocks; consult the IRS for the latest updates before filing.

Note: This article explains tax rules and recordkeeping; it is educational and not tax advice. For filing-specific guidance, consult a qualified tax professional.

Key concepts

Capital asset and taxable event

A capital asset generally includes any property you own for investment—stocks bought for personal investment are capital assets. A taxable event occurs when the asset is "realized": most commonly, when you sell or exchange the stock for cash or another property. Dividends and certain corporate restructurings can also create taxable events or adjustments.

When asking how to calculate capital gains on stocks, remember the taxable event is the sale (or other disposition) that converts unrealized gain into realized gain. Until you sell, gains are unrealized and not subject to federal income tax for most investors.

Realized vs. unrealized gains

• Unrealized gains (paper gains) = current market value − cost basis. No tax is due while the position remains open.
• Realized gains = proceeds from sale − adjusted basis − selling costs. Realized gains are reported on tax returns and may be taxed.

Knowing how to calculate capital gains on stocks requires tracking both the unrealized position and all purchase and sale details so you can compute realized gain when you sell.

Short-term vs. long-term gains

The holding period determines whether a realized gain is short‑term or long‑term. If you hold the stock for one year or less prior to sale, the gain is short‑term and taxed at ordinary income tax rates. If you hold the stock for more than one year, the gain is long‑term and generally taxed at preferential long‑term capital gains rates.

Determining the exact holding period matters when you calculate capital gains on stocks because the applicable tax rate — and therefore expected tax — can differ materially between short‑term and long‑term treatment.

Cost basis and adjusted basis

What is cost basis

Cost basis is the amount you paid to acquire the shares, including the purchase price plus transaction fees, commissions, and any other costs directly attributable to the purchase. Cost basis is the starting point for calculating gain or loss at sale. Accurately tracking basis is essential to answer "how to calculate capital gains on stocks" correctly.

Adjustments to basis

Common adjustments that increase or decrease basis include:

• Brokerage commissions and trading fees (increase basis).
• Reinvested dividends (DRIPs) — each reinvestment creates a new lot with its own basis equal to the reinvested amount.
• Return of capital distributions (decrease basis).
• Corporate reorganizations, spin‑offs, and certain acquisitions (may require reallocating basis among resulting holdings).
• Wash sale disallowance (if a loss is disallowed by wash sale rules, that disallowed loss is added to basis of the replacement shares).

When you calculate capital gains on stocks, include these adjustments so the adjusted basis reflects the true economic cost.

Reconstructing basis

If records are incomplete, you can reconstruct basis using brokerage statements, trade confirmations, bank records, historical price data, and dividend records. Many brokers provide year‑end cost basis reports or consolidated 1099 statements showing basis for lots acquired after certain years. If you use Bitget for trading or Bitget Wallet for custody, download trade confirmations and year‑end statements to support your basis calculations.

When reconstructing basis, maintain documentation of the method used and any assumptions. The IRS allows reasonable methods and expects accurate reporting supported by records.

Methods to identify which shares were sold (basis allocation)

When you sell part of your holdings in a single ticker with multiple purchase lots, you must determine which shares (lots) were sold. This influences whether the resulting gain is short‑ or long‑term and the amount of gain.

FIFO (first-in, first-out)

Under FIFO, shares you bought first are treated as sold first. Brokers commonly use FIFO by default for stocks when you haven't specified another method. FIFO is simple but can produce higher tax in rising markets because older lots often have lower basis.

If you don't make a specific election, your broker's default method (often FIFO) will apply when you calculate capital gains on stocks.

Specific share identification

You can elect to use specific share identification by notifying your broker before the sale (or following broker procedures) and specifying which lot you are selling. Specific identification allows you to choose lots with desirable tax treatment — for example, selling short‑term loss lots first or long‑term gain lots later — and can reduce taxes.

To use specific identification properly, you must clearly identify the lot at the time of sale (trade confirmation should reflect the chosen lot). Keep documentation proving the lot identification.

Average cost basis (mutual funds/ETFs)

Mutual funds and certain ETFs allow or require average cost basis accounting for taxable shareholders. Average cost computes a per‑share basis by dividing total cost by total shares owned, smoothing multiple purchases. For mutual funds, average cost is commonly used unless you specify another acceptable method.

Average cost simplifies calculations but can prevent granular tax‑loss harvesting by lot.

Other methods and requirements

Other allowable methods include LIFO (where permitted) and specific statutory methods. Brokers are required to report basis to the IRS for many covered securities and must apply a default method if the taxpayer does not choose one. To change methods, contact your broker in time and keep confirmations of the elected method.

When assessing how to calculate capital gains on stocks, check your broker's reporting category (covered vs. noncovered) and their procedures for lot identification.

Calculating the capital gain or loss (formulas and examples)

Basic formula

Fundamental formula for a sale:

Gain (or Loss) = Proceeds from sale − Adjusted basis − Selling costs

Where proceeds are gross sale proceeds (price × shares) less any direct selling costs. Adjusted basis is the original cost plus adjustments described earlier.

This formula is the core answer to "how to calculate capital gains on stocks." Apply it per lot or in aggregate after determining which lots were sold.

Percentage return and net return

Percentage gain = (Gain / Adjusted basis) × 100%

Net return after fees = (Proceeds − Selling costs + Dividends received − Purchase costs) / Purchase costs

To estimate after‑tax net return, subtract expected tax on gain (estimated rate × gain) from proceeds, then divide by purchase cost. Estimating tax rates depends on whether the gain is short‑ or long‑term and on your taxable income and filing status.

Worked examples

Example 1 — Short‑term sale:

• Bought 100 shares at $50/share on June 1, 2025. Commission $10. Cost basis = 100 × $50 + $10 = $5,010.
• Sold 100 shares at $70/share on October 1, 2025. Proceeds = 100 × $70 − $10 commission = $6,990.
• Gain = $6,990 − $5,010 = $1,980 (short‑term). Taxed as ordinary income.

Example 2 — Long‑term sale with reinvested dividends and selling costs:

• Bought 50 shares at $100/share on January 1, 2023. Commission $5. Basis = $5,005.
• Received $50 in reinvested dividends over time that purchased 0.5 shares; that reinvestment increases basis by $50.
• Sold 50.5 shares more than one year later for $130/share. Proceeds = 50.5 × $130 − $10 selling cost = $6,565 − $10 = $6,555.
• Adjusted basis = $5,005 + $50 = $5,055.
• Gain = $6,555 − $5,055 = $1,500 (long‑term). Eligible for long‑term capital gains rates.

These examples illustrate the steps you take to calculate capital gains on stocks: identify lots sold, compute adjusted basis (including fees and reinvestments), compute proceeds net of selling costs, and determine holding period for tax treatment.

Netting gains and losses; tax consequences

Offsetting gains with losses

Capital gains and losses are netted according to IRS ordering rules:

1. Net short‑term gains and losses against each other.
2. Net long‑term gains and losses against each other.
3. If one side is a net gain and the other a net loss, net them against each other.

If you have net losses after netting, you may use them to offset ordinary income up to limits and carry the remainder forward.

When you calculate capital gains on stocks for a tax year, perform netting to determine the taxable amount or deductible loss that flows to Form 1040.

Capital loss deduction and carryforward

Individuals may deduct up to $3,000 ($1,500 married filing separately) of net capital losses against ordinary income each year. Excess losses beyond the annual limit can be carried forward indefinitely to offset future capital gains and up to $3,000 of ordinary income in future years.

If you are planning how to calculate capital gains on stocks across multiple years, remember that unused losses reduce future taxable gains.

Wash sale rule

The wash sale rule disallows a loss deduction if you sell stock at a loss and buy the same or a substantially identical security within 30 days before or after the sale. The disallowed loss is added to the basis of the replacement shares, effectively deferring the loss until the replacement shares are sold.

Wash sales complicate how to calculate capital gains on stocks because disallowed losses change the adjusted basis of subsequent lots. Maintain careful trade logs and consult broker statements; some brokers identify wash sales on year‑end statements.

Tax rates and additional taxes

Short-term capital gains taxation

Short‑term capital gains are taxed as ordinary income. The specific rate depends on your federal income tax bracket for the year of the sale. When planning how to calculate capital gains on stocks, estimate your marginal tax rate for short‑term gains to approximate tax liability.

Long-term capital gains brackets and rates

Long‑term capital gains generally benefit from preferential rates. For most taxpayers, the federal long‑term capital gains rates are typically 0%, 15%, or 20%, depending on taxable income and filing status. Certain high‑income taxpayers may face the highest 20% rate for long‑term gains.

When you calculate capital gains on stocks that qualify as long‑term, apply the appropriate long‑term rate based on your expected taxable income; state taxes may also apply.

Net Investment Income Tax (NIIT) and other surtaxes

High‑income taxpayers may be subject to the 3.8% Net Investment Income Tax (NIIT) on net investment income, which can include capital gains. State and local taxes may further increase effective tax on gains.

If you need to know how to calculate capital gains on stocks and estimate after‑tax return, include NIIT and state taxes where relevant.

Special considerations (AMT, qualified dividends)

Alternative Minimum Tax (AMT) and qualified dividends have interactions with capital gains calculations. Qualified dividends receive preferential treatment similar to long‑term capital gains if holding period and source requirements are met. AMT may affect overall tax liability in certain circumstances.

For complex situations involving AMT, incentives, or special dividend classification, seek professional tax advice.

Reporting capital gains and required forms

Brokerage reporting (Form 1099‑B)

Brokers report sale transactions on Form 1099‑B, which typically shows proceeds, date acquired, date sold, and whether basis was reported to the IRS. Compare broker 1099‑B information to your own records when you calculate capital gains on stocks. Common discrepancies include missing basis for older lots or DRIP lot details.

Keep copies of 1099‑B statements and reconcile them to your calculations.

Tax forms (Form 8949 and Schedule D)

Form 8949 is where you report individual sales of capital assets and adjust amounts if necessary. Schedule D aggregates totals from Form 8949 and carries net capital gain/loss to Form 1040. Use Form 8949 to explain adjustments (e.g., wash sale adjustments or corrected basis entries) when you calculate capital gains on stocks.

If your broker reported basis to the IRS and boxes on Form 1099‑B show covered/noncovered status, the need to detail each transaction on Form 8949 may vary; still reconcile differences and attach Form 8949 where required.

Record reconciliation and common errors

Common errors include using incorrect basis, failing to account for reinvested dividends, misidentifying lots, or overlooking wash sale adjustments. Reconcile broker 1099‑B to your records, correct discrepancies before filing, and contact your broker for corrected forms if needed.

Accurate record reconciliation is central to correctly answering how to calculate capital gains on stocks.

Special situations and corporate actions

Stock splits, reverse splits, and spin‑offs

Stock splits and reverse splits change the number of shares you own and the per‑share basis but do not change total basis. For example, a 2‑for‑1 split doubles shares and halves per‑share basis. Spin‑offs may require basis allocation between the parent and new company based on value; IRS rules and company notices often provide guidance.

When you calculate capital gains on stocks affected by corporate actions, adjust share counts and basis allocations accordingly.

Dividend reinvestment plans (DRIPs)

DRIPs continually create new lots as dividends are reinvested. Each reinvestment increases your basis by the reinvested amount. Brokers may report cost basis for DRIP lots, but you must track reinvestment dates to determine holding periods for long‑ vs. short‑term gains.

DRIPs complicate how to calculate capital gains on stocks because they increase lot count and require granular basis tracking.

Options, warrants, and exercised stock options

Exercising stock options creates basis equal to cash paid plus any taxable income recognized at exercise (for nonqualified options and some ESPP/ISO scenarios). Option sales, covered calls, and option exercises have special timing and basis rules. For ESPPs and ISOs, there are special rules about disqualifying dispositions and alternative minimum tax implications.

When options are involved, work through the option tax events to compute correct adjusted basis before calculating capital gains on the underlying stock.

Gifts and inherited stock

Gifts: The recipient generally takes the donor's basis (carryover basis) for purposes of computing gain, though there are special rules for loss recognition in some cases.

Inherited stock: Beneficiaries usually receive a stepped‑up (or stepped‑down) basis equal to the fair market value at the decedent's date of death (or alternate valuation date), which often eliminates built‑in gain for the decedent's appreciation. These stepped‑up basis rules make the question of how to calculate capital gains on stocks materially different for inherited assets.

Document acquisition dates and basis when dealing with gifted or inherited shares.

Tax planning strategies

Tax‑loss harvesting

Tax‑loss harvesting involves selling positions that have unrealized losses to realize those losses and offset realized gains. Harvested losses can offset gains and up to $3,000 of ordinary income each year, with excess carried forward. Beware of the wash sale rule when harvesting: do not repurchase substantially identical securities within 30 days if you want the loss to be immediately deductible.

Tax‑loss harvesting is one of the practical techniques investors use when managing how to calculate capital gains on stocks to reduce tax liability.

Timing and holding‑period management

Delaying a sale until a position becomes long‑term can lower tax rates on gains. Spreading sales across tax years can reduce bracket bumping. Year‑end planning requires estimating realized gain and loss for the year and deciding whether to accelerate or defer sales.

When deciding how to calculate capital gains on stocks, factor in holding periods and expected taxable income to choose the most tax‑efficient timing.

Using tax‑advantaged accounts and charitable strategies

Selling appreciated stock inside tax‑deferred accounts (IRAs, 401(k)s) does not trigger immediate capital gains tax. Donating appreciated stock directly to a qualified charity can avoid capital gains tax and may yield a charitable deduction if you itemize. Qualified charitable distributions from IRAs have special rules for those aged 70½+ (or current statutory ages).

Bitget Wallet and Bitget brokerage services may be used for trading; for tax‑advantaged accounts, consult plan custodians and tax professionals.

Other advanced strategies

Advanced strategies include installment sales (spreading gain recognition), donating shares to donor‑advised funds, and investments in qualified opportunity zones that can defer or reduce gains under specific rules. Each strategy has complex requirements; evaluate them with tax counsel.

Recordkeeping and documentation

What to keep and for how long

Maintain trade confirmations, brokerage year‑end statements, Form 1099‑B, dividend statements, option exercise confirmations, and settlement statements. The IRS generally recommends keeping records for at least three years from filing, but many investors retain investment records while they own the asset plus several years after sale (often 6–7 years) to support basis and loss carryovers.

Good records simplify how to calculate capital gains on stocks and support your tax return in case of audit.

Reconstructing records and when to get professional help

If records are missing, use broker historical statements, bank records, and historical price feeds to estimate basis. For complex situations—gifted or inherited shares, corporate reorganizations, option exercises, or significant wash sale adjustments—consult a tax professional.

If you used Bitget or Bitget Wallet for trades, export your transaction history early and store it securely for future tax reporting.

Differences and considerations for cryptocurrencies and non‑stock assets

High‑level comparison to crypto

Cryptocurrencies are treated as property by the IRS, so general capital gain/loss rules often apply. However, crypto trading platforms, noncustodial wallets, and decentralized finance activities add complexity to reporting, lot identification, and valuation. Crypto transactions (trades, swaps, and certain token events) can multiply taxable events and complicate the question of how to calculate capital gains on stocks versus crypto.

For crypto, record each disposition with date, proceeds, basis, and purpose; use tools or wallet export features (Bitget Wallet supports transaction history exports) to help reconstruct basis.

Other asset classes (mutual funds, bonds, real estate)

• Mutual funds: Average cost basis rules frequently apply; capital gains distributions are reported to shareholders and can create taxable events even without selling.
• Bonds: Interest is ordinary income; gains/losses on bond sales follow capital gains rules but also consider original issue discount and amortizable bond premium.
• Real estate: Special exclusions (home sale exclusion) and depreciation recapture can significantly change gain calculations.

Each asset class has nuances; "how to calculate capital gains on stocks" covers equities specifically, while other asset classes may require additional steps.

Frequently asked questions (FAQ)

• Do I owe tax if I transfer stock between my accounts?
  Typically no tax is triggered if you transfer between your own accounts (e.g., brokerage to brokerage) as long as ownership doesn’t change; basis follows you. Transfers to different owners (gifts, sales) have different consequences.

• How do dividends affect basis?
  Cash dividends are taxable as income when received. Reinvested dividends (DRIPs) increase basis by the amount reinvested and create new lots.

• What happens if broker reports incorrect basis?
  You must report correct basis on your tax return. If a broker reports incorrect basis on Form 1099‑B, reconcile and, if necessary, attach Form 8949 with adjustments and ask the broker for a corrected 1099‑B.

• How do I choose a lot identification method?
  Consider tax outcomes: specific identification can minimize taxes by targeting short‑term gains or harvesting long‑term losses; average cost simplifies reporting but reduces flexibility.

• Does selling a portion of an inherited stock create taxable gain?
  If the sale price exceeds the stepped‑up basis, you have a gain to report; otherwise you may have no taxable gain.

Practical checklist before selling stock

• Verify your cost basis for each lot you may sell.
• Determine the holding period to classify as short‑term or long‑term.
• Check for potential wash sale exposure in the 30‑day window.
• Estimate tax impact using likely tax rates (short‑term vs. long‑term, plus NIIT/state taxes).
• Confirm broker reporting (covered vs. noncovered).
• Document intended lot identification (use specific ID if desired) and obtain trade confirmation.
• Export and store transaction history from your broker or Bitget Wallet.

Further reading and authoritative references

• IRS Topic No. 409: Capital Gains and Losses (search IRS resources for latest guidance).
• IRS instructions for Form 8949 and Schedule D for procedural reporting details.
• Broker year‑end reporting guides and cost basis FAQs from your custodian.

As of 2025-12-31, IRS materials remain the primary authoritative source for federal capital gains rules; check the IRS website and updated publications for the latest rates and procedural changes.

References / Sources used

• IRS — Topic No. 409: Capital gains and losses (IRS publications and instructions).
• Industry investor education resources and brokerage reporting guides.
• Aggregated investor tax guides and financial education resources for worked examples and planning tips.

Final notes and next steps

If you want to estimate how selling a particular holding will affect your taxes, gather purchase dates, purchase prices and commissions, reinvested dividends, and planned sale proceeds. Use the formula Gain = Proceeds − Adjusted basis − Selling costs. Consider Bitget for trading needs and Bitget Wallet for transaction history exports and custody features to make recordkeeping easier.

To explore tools that help calculate capital gains in practice, export your transaction history from your brokerage or Bitget account, review lot details, and, if needed, consult a tax professional to confirm complex adjustments.

Explore more Bitget features to streamline trade records and keep accurate basis documentation for future tax seasons.

If you trade on Bitget or use Bitget Wallet, export your transactions today to simplify how you calculate capital gains on stocks and prepare for tax time.