If you have paid attention to the market at all as of recently, you know that we are going through a very… interesting time, to say the least. There are people making money hand over fist putting their money into recovery stocks, and options contracts. Seeing everyone’s stock market success may be enough to make you want to ante up, and put some money down. Don’t be so quick to put it all on the line though. Before you start making any investments, you should ask yourself,
“How will trading stocks in a market downturn affect my taxes?”
Capital Gains Taxes
If you are trading stocks and coming out with more money than you put in, you are turning a profit. When you turn a profit on trading stocks, that profit is referred to as a capital gain. Unfortunately for you, when you make a capital gain the IRS wants a share of it. So you pay them their cut through, you guessed it, your taxes! However, you only pay taxes based on the profit you make, not based on the total amount of money you receive from selling the stock.
We know, we may have lost a few people, so here is an example with real numbers. Let’s say you bought a 1 share of a stock for $100, and the company performs really well, so the share price goes up to $150, and you sell the share. Now you’ve got $150 in your pocket, but you have to set money aside for taxes on the $50 of profit that you made.
How Much Do I Have to Pay in Taxes?
Figuring out how much you pay in taxes can be a bit of a pain. How much you pay depends largely on how long you have held the stock for. Remember that term we mentioned before, “capital gains”? Well, when it comes to taxes, there are two types of taxes on capital gains. There are both “Long Term Capital Gains” and “Short Term Capital Gains”.
If the period between buying and selling an asset is less than a year, your profits are taxed as a short term capital gain. Short term capital gains tax rates are the same as your ordinary income, so if you are in a high income tax bracket or high income tax state, you’ll probably want to limit the amount of short term capital gains you take! However, if the period between buying and selling an asset is longer than a year, the long term capital gains tax takes effect, which vary from 0%-20%. This means that depending on which tax bracket/state you’re in, you could potentially get away without having to pay taxes!
Remember, that you do have to pay the taxman at some point if you’re making money in the stock market. However, if you’re smart about your investing, you can really minimize the amount of money you have to pay for taxes!