{"id":175795,"date":"2020-09-09T18:34:00","date_gmt":"2020-09-09T22:34:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/trading-lessons\/capital-gains-for-stocks-and-mutual-funds\/"},"modified":"2026-06-26T14:52:21","modified_gmt":"2026-06-26T18:52:21","slug":"capital-gains-for-stocks-and-mutual-funds","status":"publish","type":"trading-lessons","link":"https:\/\/www.interactivebrokers.com\/campus\/trading-lessons\/capital-gains-for-stocks-and-mutual-funds\/","title":{"rendered":"Capital Gains for Stocks and Mutual Funds"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\"><strong>New to Interactive Brokers?<\/strong><\/p>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button has-custom-width wp-block-button__width-50\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/ndcdyn.interactivebrokers.com\/mkt\/?src=taUSTAXAcc&amp;url=%2FUniversal%2FApplication\" target=\"_blank\" rel=\"noreferrer noopener\">Open Account<\/a><\/div>\n<\/div>\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n\n\n<h4>What are tax lots?<\/h4>\nEach purchase of a security creates a tax lot. For example, if on January 15 you buy 100 shares of XYZ\nstock for $100, that is one tax lot. If on January 17 you buy 100 shares of XYZ stock for $90, that creates\na separate tax lot. Separate tax lots can be created with purchases within the same day of the same\nsecurity.\n<h4>Why are tax lots important?<\/h4>\nTax lots are used to determine cost basis and holding period for US tax. US tax law mandates that you\nsell securities by tax lot. Average cost (averaging the purchases of all shares over time) is only allowed\nfor mutual funds and securities that have participated in Dividend Reinvestment Plans (DRIPs). Some\nbrokers do not support cost basis reporting for average cost and use the standard tax lot reporting.\n<h4>Tax lot methods for recognizing capital gains<\/h4>\nTax lots are used to identify exactly what is being sold at what time. Technically, in the US Tax Code\nthere are two methods of using tax lots to determine gains\/losses and holding period: The default\nmethod is First In, First Out. The oldest lot \u2013 or first purchase \u2013 is deemed to be the first one sold.\nThe second method is specific identification \u2013 that is where the owner specifies to the broker what lot is\nto be sold. This must be done before the settlement of the transaction. What about the algorithms that\ndetermine what to sell to either maximize loss or holding period? These are program scripts that review\nthe tax lot and specifically identify what should be sold mathematically. They are just automated\nversions of the specific identification method.\n<h4>Holding Periods<\/h4>\nThere are two holding periods used to determine the US tax rate for capital gains. Over the years the\nlength of these has changed, but the general concept has remained the same.\nShort-term capital gains\/losses occur on tax lots that you have held less than a year and one day from\nthe trade date.\n\nLong-term capital gains\/losses are anything held over a year and a day.\n\nRemember that this applies to tax lots or each individual purchase, so that if you have three different\npurchases of a security on three consecutive dates and decide to sell it one year from the middle day,\nonly the first purchase will be long-term.\n\nIt is a common misconception that a year is March 2 to March 2, for example. However, for tax\npurposes, the day of purchase (trade) does not count for a security. In order to receive long-term\ntreatment, you must own it for a year and a day.\n<h4>Gains versus Losses \u2013 How do they offset?<\/h4>\nWhen computing tax on gains and losses there is an ordering as to how they offset one another. Short-term gains are first offset by short-term losses. Likewise, long-term gains are offset by long-term losses.\n\nIf there are short-term and long-term gains, they are taxed at their respective rates. It there is a short-term loss, it offsets long-term gains and the remaining gain is taxed at the long-term rate. If there is a\nlong-term loss, it offsets the short-term gain and the remainder is taxed as ordinary income.\n\nNet loss is limited to $3,000 per year to offset income other than capital gains, such as wages, interest\nand dividends. Any loss in excess of $3,000 is carried forward to the next year (or beyond, until used\nagainst gains).\n<h4>Tax Rates<\/h4>\nShort-term capital gains are taxed at ordinary income tax rates. Long-term capital gains are taxed at 0%,\n15% or 20% depending on your adjusted income.","protected":false},"excerpt":{"rendered":"<p>The main topics of this lesson are: What are tax lots?;  Why are tax lots important?;  Tax Lot methods for recognizing capital gains;  Holding Periods;  Gains versus Losses \u2013 How do they offset?; and Tax Rates. For this lesson refer to the Study Notes and watch the video for a synopsis.<\/p>\n","protected":false},"author":929,"featured_media":221455,"parent":0,"comment_status":"open","ping_status":"open","template":"","meta":{"_acf_changed":false,"footnotes":""},"contributors-categories":[13576],"traders-academy":[13125,13128,13132],"class_list":["post-175795","trading-lessons","type-trading-lessons","status-publish","has-post-thumbnail","contributors-categories-interactive-brokers","traders-academy-beginner-trading","traders-academy-level","traders-academy-trading-lesson"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v28.1) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Archives | Traders&#039; Academy | IBKR Campus<\/title>\n<meta name=\"description\" content=\"The main topics of this lesson are: What are tax lots?; 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