This is too late to help you now, but I will post this here in the hope of helping people reading this who have children in their sophomore year of hs or earlier.
You should have avoided taking capital gains in the calendar year before the year your child starts college, ie your "base year" (usually the year that consists of the 2nd half of your child's junior year in hs and the first half of the senior year). Taking the capital gains last year would have been better, in terms of financial aid eligibility. You do have to report the capital gains on your tax return, and it increases your AGI. Likewise, you do have to add back in any IRA contributions that were deducted from your taxable income. You might try explaining to the schools (or in the space available on the FAFSA or Profile) that your 2010 income figures do not reflect your typical income - that there was a one-time increase in income due to the sale of stock. This may or may not help, but it probably doesn't hurt to try.
I *highly* recommend that everyone, preferably by your child's sophomore year of hs or early in the junior year, read Kalman Chany's "Paying For College Without Going Broke" as well as this page on the FinAid.org website: FinAid | Financial Aid Applications | Maximizing Your Aid Eligibility
Here is the relevant section from the FinAid page:
Avoid incurring capital gains during the base year. Capital gains are treated like income. Sell the stocks and bonds during the sophomore year in high school. If you must sell the securities while your child is in college, wait until April of their junior year, when their last financial aid application has been filed. If you sell the securities during their freshman, sophomore, or junior year in college, it will reduce their eligibility for aid during the subsequent year. You could try to compensate by selling some of the losers in your portfolio. |
Note that many schools do not allow offsetting losses. For example, you cannot use capital losses to offset your salary.