How Capital Gains Are Calculated

How are capital gains calculated? Where do I change capital gains assumptions such as cost basis and the percent of the return due to capital gains?

WealthTrace uses the account cost basis and the First In, First Out (FIFO) method to estimate capital gains taxes when you withdraw from a taxable investment account.

How FIFO works

• FIFO (First In, First Out) means the program assumes the first shares you bought are the first shares you sell.

How cost basis affects taxes

• Cost basis is what you originally invested (what you paid for the shares).
• When you withdraw money from a taxable investment account:
  • WealthTrace reduces the account’s remaining cost basis as shares are sold.
  • Only withdrawals above the remaining cost basis are taxed as capital gains.
• Once the account’s remaining cost basis is fully used up, future sales are treated as coming from investment gains, so withdrawals may be fully taxable as capital gains.

Where to find this in WealthTrace

• Capital gains taxes paid from taxable investment withdrawals appear in the withdrawals/taxes projections under Cash Flow Projections(Screenshot 1).
• The cost basis for each investment account is shown in the account details (Screenshot 2).
• You can also view the projected cost basis over time by account (Screenshot 3).

Adjusting what portion of return is capital gains

In the Asset Class Mapping section (Screenshot 4), you can view and edit the share of annual return attributed to capital gains:

• Annual return is split into dividends, interest, and price growth.
• Any return not attributed to dividends or interest is treated as price growth.
• Price growth is the part that can become taxable capital gains when gains are realized (when assets are sold to fund withdrawals).