Much of America – and other parts of the world – was gripped by the investment success of the / r / WallStreetBets Reddit forum in late January, where several small-scale investors have a weakness in the stock market. and successfully explored it by creating many individual stories of hardship and wealth. The people who correct the GameStop investment have made a lot of money.
Now that the dust has subsided somewhat and some savvy investors are suddenly seeing large balances in their checking accounts, there is one important thing to consider. Taxes.
Do I have to pay taxes on the money I make from investments?
Yes. If you bought GameStop shares and sold them for a profit, you have to pay taxes. The broker or brokers who bought and sold your stock will report the information to the IRS and you will be subject to income tax. However, you should focus on the word “win” as it is important.
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Let’s say you bought 10 GameStop shares for $ 5 per share without commission and then sold them for $ 300 per share without commission. Your initial investment cost was $ 50, but you withdrew $ 3,000. For this investment, his profit was $ 2,950, which is his tax liability.
What if I have to charge a commission for buying and selling? Let’s assume the commission was $ 5 for the purchase and $ 5 for the purchase. In this case, you bought 10 GameStop shares for $ 5 per share and a $ 5 commission. This means that your base is $ 55, which is the amount paid for the activity, including fees and commissions.
If you sell the investment and make $ 3000, but also charge $ 5, you actually make $ 2,995. This is the realized amount, the money that ends up in your account after commissions and fees.
In that situation, you’d pay $ 2,940 in tax, the result of subtracting the base from the realized amount.
It is very important to note that if you lose money on another investment, you can use it to balance your profits. So, if you bought 100 AMC stock for $ 15 a share and sold it for $ 8 a share, you lost $ 700. You can then subtract the $ 700 loss from the $ 2,950 profit, which means you only owe more than $ 2,250. of taxes. . If you have lost more than you have earned, you can use retention losses to offset up to $ 3,000 in other earnings, such as regular income, and you can expect unused retention losses, so if you lose a total of $ 9,000, you can save those $ 6000 that you can use in the future.
Another important thing to consider is whether long-term or short-term income changes the tax rate you have to pay.
What are short-term capital gains?
If you had an investment of a year or less before selling it for profit, it is considered a short-term gain. For example, if you bought GameStop shares on January 12, 2021, and sold them on January 28, 2021, this is a short-term gain. Almost everyone who makes quick money with MoneyStop is subject to a short-term capital gains tax.
What if I make a short-term profit?
Currently, short-term earnings are taxed as normal income in the United States. You add your investment income to your total income for the year and you usually pay income tax. Your exact percentage will depend on which tax category you are in, based on your total income.
It is important to note that short-term losses are greater than short-term gains. So, if you are losing money on a short-term investment, subtract the total amount you earned here.
If you are concerned about how to handle the capital gains tax in your situation, talk to a lawyer who can help you with the details.
What are long-term capital gains?
If you have had investment for more than a year before selling it at a profit, it is considered a long-term capital gain. For example, if you bought GameStop shares on January 12, 2020, and sold them on January 28, 2021, this is a long-term gain.
What if I make and earn a long-term profit?
Long-term capital gains in the United States are charged at a lower interest rate than short-term capital gains. Depending on the income, rates of 0%, 15%, or 20% are charged. Here are the current long-term tax rates for capital gains.
Implications for Tax Deductions
What is the payroll tax credit?
Another important aspect of GameStop’s income tax is the income tax deduction. The income tax credit is a tax credit granted to low- and middle-income families, especially those with children. This is a full tax credit, which means that the amount owed to the IRS is reduced, which can result in a much smaller tax bill or a much larger refund.
There are many rules for qualifying for the tax credit. The most important requirement is that the lowest income be relatively low, but that the eligibility limit for each child in your family increases significantly. Additionally, the amount you can claim increases significantly if you have children, up to $ 6,728 by 2021 if you have three or more qualified children.
How investment income affects income tax reduction
However, this tax cut has a major drawback. Your total investment income must be $ 3,650 or less to be eligible. If you have more than one eligible child and are still eligible for the payroll tax credit, you will lose money if the tax credit exceeds your total income when you cross the threshold.
Submit a tax return if you received unemployment benefits in 2020
What happens if I lose my payroll tax credit?
If you lose your employee’s tax credit due to investment income, you simply have to pay a larger tax bill than otherwise, because the discount disappears. If you are close to the limit, put a small loss on the investment below the level and consider making another small investment so that your credit is still repaid in the event of a loss of money. Income taxes accumulated in the following year.
For example, if you qualify for the EITC in 2020 and are likely to be eligible again in 2021, not only can you earn $ 4,000 in investment income, but you can also use some of your investment income to invest in other short-term investments. If successful, your investment income will be so high that you won’t lose any tax credits. In the event of a loss, sell it if your total investment income is less than $ 3,650. There is no point in having a very high investment income, as you will have to lose a lot of money to recover a very small tax credit – it only makes sense if you are close.
If you are concerned about the income tax credit you will receive in your specific situation, quickly contact a tax advisor. This can help you determine the details of your tax situation.
Make a plan before you spend any money
Either way, if you make an investment income on the Wall Street bet, congratulations. Instead of spending that money, however, you should consider using it in a way that can make it better for you in the future.
First, make sure you book enough taxes. Since this is likely to be a short-term capital gain, we recommend using a tax calculator to see how much you owe next spring. With the Intuit tax calculator, you can get a rough estimate of your tax bill. Make sure you keep at least part of your income. This is the most important since you don’t want any invoices in April.