The profit you make on the sale of stock is known as a capital gain. If you have owned the stock for a year or longer, your increase is considered a long-term capital gain for income tax purposes. This means you pay the tax at a lower rate than you pay on your earned income or on dividends and other investment income.

The government encourages "buy and hold" investments by giving a break on investments that are held longer than one year. Gains are then taxed at three rates,0%, 15% and 20%, dependent on your income tax bracket (10%, 12%, 22%, 24% 32% 35% or 37%).

According to the IRS, if your capital losses exceed your capital gains the amount of the excess loss that you can claim on line 13 of our 1040 form is the lessor of $3,000 ($1,500 if you are married filing separately), or your total net loss shown on line 16. If your net loss is more than this limit you can carry the loss forward to later years.