A number of readers have asked about the tax treatment of broker commissions.

Q: How are the brokerage commissions for buying and selling stocks figured into the taxes due from a stock sale? Is the buying commission added to the cost basis? Is the selling commission deducted from the proceeds after selling? Or should the commissions instead appear as an itemized deduction as an investment expense and subject to a 2% adjusted gross income floor?

A: By definition, the expenses incurred in purchasing or selling a capital asset (stock, in this example) are capital costs, and are required to be added to or subtracted from the basis (or cost, for tax purposes) of the stock. They are NOT miscellaneous itemized deductions subject to the 2% limitation.

For example: You buy 100 shares of XYZ company for $30 per share. You are also charged $39 in sales commissions and $3 in other charges. Your actual cost of the stock would be $3,042 ($3,000 PLUS costs and commissions of $42).

Now, lets say you sell the 100 shares at a later date for $35. You are again charged a commission of $39 and additional charges of $3. Your "net" sales price (generally, the amount reported to you by your broker at year-end on your Form 1099B) would be $3,458 ($3,500 LESS $42).

When you report this sale on your tax return, you would report a gain of $416 (the net sales proceeds of $3,458 LESS your original basis of $3,042).

So there you have it. Short and sweet.

- Article 02

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