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proceeds (save commissions) are called capital gains and would be taxed at a special rate. As you log profits and losses throughout the year, you must report them all to the IRS and pay capital gains taxes if you have had a net profit for the year. Special laws provide for lower taxation on stocks held for 18 months or longer. Yet another incentive to be a long-term investor. Capital losses, on the other hand, are deductible items. But here is where Uncle Sam gets smart. If you have a net profit for the tax year you will be slapped with a capital gains tax on your entire profit (generally at 20%). However with capital losses you are only allowed up to a maximum amount of deduction (around $3,000) for that year. If your losses are more than the allowable maximum deduction, then you must carry over the rest to the following year where you can once again write it off up to that year's maximum allowable deduction. You continue with this carry-over for as many years it takes until you have written off your entire capital losses. Of course if you have very large capital losses (e.g., $300,000) you will never be able to write it all off.

Let me reiterate an important technical point here. Until you settle a stock position (i.e., sell your stocks, or cover your shorts) you don't have a profit or loss. You can look at your positions in terms of unrealized (a.k.a. paper) profits and losses, but until you actually settle some or all of them, there is nothing to report to the IRS. Sometimes people may complain about losses or brag about gains they have had in a stock. Unless they have settled their positions, these losses and gains are just on paper. If left unsettled, those positions could reverse themselves as stock prices move up or down. Only when you have settled your stock position, can you truly bemoan a loss or rejoice in a profit.

I hope that this chapter has been able to offer you some good insight into the world of stocks. Obviously a complete and detailed coverage of stocks and all their aspects would require volumes of books, and they …