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Stocks, shares, and social media dominated the news cycle this month. When hedge funders bet on video game retailer GameStop’s losing value, Redditors declared war on Wall Street, starting a trading frenzy that melted financial markets. GameStop’s stock price dropped, then popped, surging a mind-boggling 1,500 percent. Redditors made millions, and Wall Street lost billions.
But will investors pay income tax on GameStop stock? And, more importantly, will you pay tax on your investments? It’s time to clear up the confusion.
But it’s more complicated than this. If you don’t want an enormous tax bill from Uncle Sam, read on.
The bad news is yes. (The feds call the money made from stocks “capital gains.”) Investing in stock can be an astonishingly simple way to make cash and protect your financial future, but, like with most money matters, there are tax consequences.
Here are two important things to remember:
Say you had stock, sold it, and made a profit. (Congratulations!) How much tax would you pay? Well, it all depends on the profits you made and how long you held the stock.
Consider these two scenarios:
If you had stock for less than a year and sold the stock, you’d pay tax on any profits from the sale. (A tax called short-term capital gains tax.) The amount of tax you pay is the same as your tax bracket.
Tax is taxing. But a financial planner does all the hard work for you. Check out this guide from Simple Thrifty Living.
OK, so you had stock for more than a year. In this scenario, you’d also have to pay tax on any profits from the sale. (Long-term capital gains tax.) But the amount of tax you pay is a little more complicated.
It could be:
Whether you pay 0, 15, or 20 percent depends on:
The IRS changes income thresholds for the 0, 15, and 20 percent tax rates every year, so you need to research the specific numbers, but below are a couple of rough examples:
A quick side-note: You might be interested in some other tax deductions for married couples. Simple Thrifty Living has compiled the best ones in this super-useful guide.
Pro-tip: For most people, long-term capital gains tax costs less than short-term capital gains tax, so it makes financial sense to keep stock for more than a year before selling it. The average worker in the United States pays 24 percent tax, which is more than the 20 percent (maximum) rate for long-term capital gains tax.
Again, yes. All dividends from stock count as taxable income, but how much tax you pay depends on the dividend type. It sounds confusing, but it’s like the capital gains tax method mentioned above.
It’s pretty simple. You report all stock profits, losses, and dividends from January 1 through December 31 on Schedule D of Form 1040 (the tax return you fill out every year.) You’d then pay any tax due like you would with income — by the infamous April 15 deadline.
Few people realize they have to pay tax on stock profit and dividends, so you must know your legal obligations before investing in the stock market. How much tax you pay depends on various factors, so do your research.