@tphtph wrote:
Thank you very much for all the replies, especially to Opus for all the detail. We are obviously new to this, and I probably didn't word things right.
I guess, the most basic question overall is this;
If I invest $5,000 of my own post-tax money and buy stocks, and then say the value doubles. I sell them for $10,000.
Leaving out broker fees and things like that for now, say I receive a payout of $10,000.
What I have earned is $5,000. 5K was my own original money, and 5K I earned in the gain. So does the broker report that income as $5,000 (what I earned) or as $10,000 (the amount they just gave me)?
In the hypothetical case: The 1099-B from the broker will show the gross sales proceeds in box 1d and the cost basis in box 1e. Either "short term" or "long term" gain will be checked in box 2. From that, Turbotax will calculate your capital gains tax. In your example, the broker would report $5000 as the cost basis and $10,000 as the proceeds, and Turbotax would calculate the tax you owe on a $5000 short or long term gain.
However, it probably won't be that simple. Suppose the stock paid dividends and your broker held them in your account as cash. That $10,000 might represent $9500 in gross proceeds from the sale and $500 of dividends. Then you would have a $4500 capital gain and $500 of dividend income, which are taxed differently, even though your overall "income" (over your original investment) is still $5000.
Or, the broker might reinvest the dividends. You could get a 1099-DIV in year 1 representing the $500 of dividends which are taxable to you, even though you didn't get the cash. The broker reinvests the $500 by buying new shares. Then if you sell out in year 2, and make $10,000, your adjusted basis is now $5,500—your original investment plus the reinvested dividends that you paid taxes on—and your capital gain is $4500. You pay tax on the $500 of dividends in year 1, and on the $4500 of capital gains in year 2.
Or, let's say you buy shares in a mutual fund. The fund manager decides to sell their position in company X and they buy company Y instead. You might pay capital gains tax on your share of the mutual fund's gain on company X, even though you never received the money. But since it is reinvested, it increases your adjusted cost basis in the mutual fund by the amount of the reinvestment.
In each scenario, your overall income on the investment is still $5000, and you still paid tax on the $5000 increase in value, but the exact manner and timing of the tax is slightly different. Bottom line is you should only ever pay tax on your increase (gains or dividends).
