Will Redditors Pay Income Tax on All That GameStop Stock? What About Your Stock?

• Profits on the sale of stock are taxable. That’s the law.
• How much tax you pay depends on how long you had the shares.
• Dividends you receive from stock are also taxable.

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:

1. Only profits you make on the sale of stock are taxable.
2. The amount of tax you pay depends on how long you had the stock.

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:

You Had the Stock for Less Than a Year

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.

Example

• Say you had Disney stock for six months.
• You sold the stock and made a profit of $1,000.
• You would pay short-term capital gains tax on this $1,000.
• Now say your tax bracket is 25 percent.
• You’d pay 25 percent tax on the $1,000. That’s $250.
• You have $750 left after tax.

Tax is taxing. But a financial planner does all the hard work for you. Check out this guide from Simple Thrifty Living. 

You Had the Stock for More Than a Year

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:

• 0 percent,
• 15 percent, or
• 20 percent.

Whether you pay 0, 15, or 20 percent depends on:

1. Income: The more money you make every year, the more tax you pay.
2. Filing Status: If you’re single, you pay a different amount than someone married.

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:

Example 1

• Say you had Apple stock for 18 months.
• You sold the stock and made a profit of $1,000.
• You’d pay long-term capital gains tax on this $1,000.
• Now say you are single and earn $50,000 in the 2021 tax year.
• You’d pay 15 percent tax on the $1,000. That’s $150.
• You have $850 left after tax.

Example 2

• Say you had Netflix stock for 18 months.
• Then, you sold the stock and made a profit of $1,000.
• You’d also pay long-term capital gains tax on this stock.
• You file your taxes jointly with your spouse and earn $50,000 in the 2021 tax year.
• Now, you pay 0 percent tax on the $1,000. That’s $0.
• You get to keep the entire amount.

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.

• Non-Qualified Dividends/Ordinary Dividends: You pay the same amount as your current tax bracket.
• Qualified Dividends: You pay 0, 15, or 20 percent depending on your income and filing status.

Example

• Say you make $1,000 in non-qualified dividends from GameStop stock.
• Your current tax bracket is 20 percent.
• You pay 20 percent tax on your stock dividends. That’s $200.

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.

Example

• Say you made $1,000 from Dell stock this year.
• You report the profit in Schedule D of Form 1040 in January next year.
• Now you pay any tax due by April 15 next year.

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.