Avoiding Capital Gains Tax On Stock Sale

December 5, 2004
By Srinidhi Goenka

A large number of people purchase shares and stock today. Most of us do it to make a quick buck. Avoiding capital gains tax on a stock sale is very important for us as it takes away an important chunk from our profits.

In order to understand how to avoid capital gains tax on stock sale, we first need to know the basic rules which determine the capital gains tax on it.

Firstly, you should start by making a list of all the assets that you have disposed off in the tax year. Then, calculate the gain made on each asset. Now, see what relief is available to you for every asset. Then, add up your total gains less relief and allowable losses to calculate your net gain for the year. If your net gain is less than the AEA (Annual Exempt Amount) which is GBP 8,200 for 2004-05, then you do not have to pay any capital gains tax. But if they are more, then you have to pay the tax on the excess amount.

Avoiding the Tax
As we can understand from the above, the capital gains tax is only applicable to the gains made in a year. So, if you have made any losses in the sale of securities, these losses can reduce your gains and thus the tax.

Also, as we all know that capital tax gain rates are normally lower than income tax rates, this clause often works in favor of the taxpayer. Let us take an example.

For example, you fall in the 27% bracket. Your net long-term capital gain on stocks is worth $2,000. Now, the tax due from the gain would be calculated at 20% i.e. a total of $400.

But if you had a net long-term capital loss of $2,000 instead of a gain, then the tax savings would be calculated at the ordinary rate of 27%, for a $540 reduction in taxes.
Thus, we can see that how easy and simple it is to avoid the tax on the sale of stock. You can turn your losses into an advantage as well!