What Are the Tax Consequences of a Disposition of Shares?

A disposition of shares is the act of giving up ownership of stock. This transfer is a reportable event for tax purposes, and the transaction must be detailed on your tax return. The specific tax consequences depend on how the shares are disposed of and whether the transaction results in a financial gain or loss.

Common Methods of Share Disposition

Sale or Exchange

The most frequent method of disposing of shares is through a sale or exchange, where a shareholder trades their shares for cash or other property. An exchange can involve complex arrangements, such as trading stock in one company for stock in another during a merger.

Gift

A gift of shares involves transferring ownership to another individual without receiving payment. This is a common way to pass assets to family members. The act of giving the shares is considered a disposition for the giver.

Inheritance

When a shareholder passes away, their shares are transferred to their heirs or beneficiaries as part of their estate. This transfer is a disposition that occurs at the time of the owner’s death.

Worthless Securities

If a stock loses all its value and the company becomes defunct, the shares are considered worthless. An investor can declare a security worthless to realize a capital loss for tax purposes. This is treated as a disposition, as if the stock were sold for $0 on the last day of the tax year.

Calculating Taxable Gain or Loss

To determine the tax impact of a share disposition, you must calculate the realized gain or loss. The formula is the proceeds from the disposition minus the adjusted basis of the shares.

The proceeds are the total amount received from the disposition. In a sale, this is the gross amount of cash received before expenses. Any brokerage commissions or other transaction fees paid are subtracted from the gross proceeds to determine the amount used in the gain or loss calculation.

An asset’s adjusted basis is its cost for tax purposes. For shares purchased on the open market, the basis is the original purchase price plus any commissions or fees paid at the time of acquisition.

For inherited shares, the recipient’s basis is typically the fair market value of the stock on the date of the original owner’s death. This is known as a “stepped-up basis” and can reduce the taxable gain for the heir if the stock has appreciated over time.

For gifted shares, the recipient generally assumes the giver’s original cost basis, which is a “carryover basis.” An exception applies if the fair market value of the shares at the time of the gift is lower than the donor’s basis. In this scenario, the basis for determining a loss is the lower fair market value, which prevents the transfer of built-in losses.

The holding period is the length of time an investor owns the shares. The period begins on the day after the shares are acquired and ends on the day they are sold. A holding period of one year or less qualifies as short-term, while holding the shares for more than one year makes it long-term.

Tax Treatment and Reporting Requirements

The tax rates applied to capital gains vary based on whether they are short-term or long-term. Short-term capital gains are taxed at the same rates as an individual’s ordinary income, which can be as high as 37% depending on their tax bracket.

Long-term capital gains receive more favorable tax treatment, with rates of 0%, 15%, or 20%. For 2025, an individual filer with a taxable income of up to $48,350 will pay a 0% rate on long-term gains. The 15% rate applies to incomes between $48,351 and $533,400, and the 20% rate applies to incomes above that threshold.

In addition to these rates, high-income taxpayers may be subject to the 3.8% Net Investment Income Tax (NIIT) on their capital gains. This tax generally applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds an income threshold.

Required Information and Forms

After a sale, the broker issues Form 1099-B. This form details the gross proceeds, the date of the sale, and a description of the shares sold. While brokers are required to report the cost basis on Form 1099-B, this information may be incorrect or missing, especially for shares acquired long ago or not through a direct purchase.

The details of each stock disposition are reported on Form 8949. On this form, you list each transaction’s details, including the property description, acquisition and sale dates, sales price, and cost basis. If the basis on Form 1099-B is incorrect, Form 8949 is where you make corrections.

The totals from Form 8949 are summarized on Schedule D. This form consolidates short-term and long-term gains and losses to calculate the final net capital gain or loss for the tax year, which is then included in your total income.

Special Rules for Share Dispositions

The Wash Sale Rule

The wash sale rule prevents investors from claiming a loss on a security if they purchase a “substantially identical” security within 30 days before or after the sale. This 61-day window stops taxpayers from creating artificial losses for tax benefits while maintaining their investment position. If a loss is disallowed by this rule, the amount is added to the cost basis of the new shares, deferring the loss until they are sold.

Netting Capital Gains and Losses

Taxpayers must follow a specific netting process when they have both capital gains and losses. First, short-term gains and losses are netted against each other, and long-term gains and losses are netted against each other. If there is a net gain in one category and a net loss in the other, they are then netted against each other. This process determines the final net capital gain or loss for the year.

Capital Loss Deduction Limit

If you have a net capital loss for the year, there is a limit on how much can be deducted against other income, such as salary. The annual deduction limit is $3,000 for single filers and married couples filing jointly, or $1,500 for those married filing separately. Any net capital loss exceeding this limit can be carried forward to future tax years to offset capital gains.