So you made a bundle on GameStop. Get ready to pay the taxes
If youre among the investors
who made money in the recent rally of GameStop, AMC and other high-flying stocks,
be prepared to pay the taxman.
You may not be aware
you'll be on the hook
for paying capital gains taxes
on any profits,
an issue
that seasoned investors are focused on
since a tax hit lowers their after-tax rate of return.
But first,
its important to be aware of
when and how you may owe taxes
on that GameStop stock —
although some investors might end up recording a loss,
given Tuesdays plunge in the game retailers stock price.
Investors
who sold their stock in early 2021
to lock in their gains
will need to pay the capital gains tax
in early 2022,
when they file their tax returns
for the current year.
Some investors have made small fortunes
in the past month,
such as one 19-year-old
who told USA TODAY
his account had peaked
above a life-changing $100,000.
But investors
who havent sold shares,
even if they are enjoying paper gains,
wont owe anything —
a fact
that some younger investors might not realize,
experts say.
We've seen an increase
in millennial and Gen Z investors,
especially over the past year
with what's going on
in the volatile stock market,
says Lisa Greene-Lewis,
TurboTax CPA and tax expert.
Even my nephew,
he thought
he would have to claim something
on his taxes
when he didn't have a sales transaction.
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Long-term vs. short-term capital gains
A stock sale results in either a gain or a loss, and
your brokerage will send you a 1099-B form
that youll need to file your taxes.
The form lists basic information
about your stock sale,
such as the date
when you sold the stock and
the basis
for the shares,
which is the price
you paid for the stock.
That will help you compute your capital gains tax.
The amount of tax
youll pay will
depend on two things:
The length of time
you held the stock and
your income.
If you held it
over a year and
sold it,
then
it's long-term capital gains tax,
says Robert Conzo,
a certified financial planner and
CEO of The Wealth Alliance,
an investment advisory firm
with about $1 billion in assets under management.
If it's less than a year,
it's short-term capital gains tax.
Theres a significant
difference between the tax rates,
since the IRS treats long-term gains
more favorably.
Short-term gains are taxed
according to your tax bracket,
with the highest marginal rate
Most investors, however, wont pay a tax rate
higher than 15%
on their long-term capital gains.
Single taxpayers
who earn up to $40,000
a year
pay no tax at all,
while single earners
from $40,001 to $441,450
pay 15%.
Single people
who earn above that
pay 20%.
(There are slightly different income thresholds
for other taxpayers,
such as married couples filing jointly,
Oh, and
theres one other catch:
High-income investors may also be on the hook
for the net investment income tax,
a levy of 3.8%
for single earners
over $200,000 and
married couples filing
jointly with incomes
over $250,000.
No tax bill surprises
Investors
who have locked in gains
can use an online calculator,
such as this free one at TurboTaxs website,
to estimate what theyll owe.
Thats important to get a handle on now,
rather than face a surprise tax bill
when you prepare your taxes.
If they use the calculator,
they know
what to expect and
can put aside the money,
TurboTaxs Greene-Lewis says.
Maybe they can do some other tax moves
that can help their tax situation
if they are expecting a gain.
Seasoned traders turn to a strategy
called tax-loss harvesting
to lower their tax hit,
notes Conzo.
Say I bought GameStop and
made $100 —
that's a short-term capital gain.
Say I look in my portfolio and
see something else has a $100 loss.
I'm going to sell that,
realize the $100 loss and
offset the capital gain.
Count your losses
Its a very, very powerful technique
for lowering an investors tax hit,
he added.
Investors should also be aware
they will likely pay a capital gains tax
to their state,
since the majority of states levy such a tax
on their residents,
although the rates vary.
People have to understand,
when you make money,
youll owe the IRS taxes,
Conzo says.
And when you trade and made big money on GameStop,
you should put money aside, or
do a tax projection
at some point
during the year
to determine your potential tax liability
that you'll need to pay
by April 15 of next year.