For taxes, your paper gains and losses don't matter
— -- Q: Do you have to pay taxes on the paper profit you made on stocks, or don't you have to pay until the stock is sold?
A: It's tax time, and that means many investors are wondering what they owe, or how they can use their recent losses to cut their tax bills.
When it comes to capital gains and losses on stocks in taxable accounts, you only need to know one thing, and that is the difference between a realized and an unrealized gain. Simply put, you have to sell a stock to realize a gain or a loss. Unrealized gains or losses don't count for income tax purposes.
Let's use an example. Say you bought a stock for $10 a share and its price at the end of 2008 was $15. If you didn't sell it, you would have an unrealized gain of $5 a share. You do not report that gain to the IRS.
The same goes for losses. Let's say your $10 stock had fallen to $5 at the end of 2008, but you didn't sell. That's an unrealized loss and you cannot claim a capital loss on your income taxes for 2008.
Everything changes if you sold the stock. If you sold the stock for a gain in 2008, you have a realized capital gain that must be reported to the IRS for that tax year. Likewise, if you sold at a loss, you have a realized capital loss and can use that to offset any gains you had that year, or offset up to $3,000 of ordinary income.
Just remember. Realized gains are the only ones that matter for tax purposes.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.
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