Here are the taxes you will pay on / r / WallStreetBets investment earnings
Much of the United States was caught up in the excitement of the success of the / r / WallStreetBets Reddit forum in late January. Small investors identified a weak spot in the stock market and exploited it, creating many stories ranging from misery to wealth.
Now that the dust has settled and some investors are seeing large balances on their checking accounts, there is one important thing to consider: taxes.
Do I have to pay taxes on the money I earn by investing?
Yes. If you bought and sold shares of GameStop (or any other company) at a profit, taxes will need to be paid. The brokerage (s) you used to buy and sell stocks will report this information to the IRS, and you will owe income taxes. You should however focus on the word “won” here because it is important.
Let’s say you bought 10 GameStop shares at $ 5 per share at no charge, then sold them for $ 300 per share at no charge. Your initial cost for this investment was $ 50, but you withdrew $ 3,000. For this investment, your Gain was $ 2,950, and that is the amount you will have to pay taxes on.
What if you had to pay fees to buy and sell? Let’s say the fees were $ 5 to buy and $ 5 to sell. In this case, you bought 10 shares of GameStop at $ 5 a share and paid a fee of $ 5. This means that your base is $ 55: the amount you paid for the asset, including fees and commissions.
If you sold the investment and earned $ 3,000, but were charged $ 5 again, you actually earned $ 2,995. This is your amount realized: the money that ended up in your account after fees and commissions.
In this situation, you would have owed taxes on $ 2,940, which is the result of subtracting the base from the amount realized.
It is very important to note that if you have lost money on another investment, you can use it to offset those gains. So if you bought 100 shares of AMC at $ 15 a share and sold them at $ 8 a share, you lost $ 700. You could subtract the $ 700 loss from the $ 2,950 gain, which means you only owe tax on $ 2,250.
If you’ve lost more than what you earned, you can use capital losses to offset up to $ 3,000 from other income, such as normal gains, and you can carry unused capital losses forward to future years. So if you lost $ 9,000 in total, you could carry $ 6,000 in losses to use in the future.
Another important thing to consider is whether these are long term or short term gains, which change the tax rate you have to pay.
Short-term capital gains
What are short-term capital gains?
If you hold an investment for a year or less before selling it, it is considered a short-term capital gain. For example, if you bought shares of GameStop on January 12, 2021 and sold them on January 28, 2021, this is a short-term gain. Almost anyone who has made a quick profit buying and selling GameStop will need short-term capital gains taxes.
What if I made short-term gains?
Currently, short-term capital gains in the United States are taxed as normal income. You would simply add your investment income to your total income for the year and pay taxes normally on that income. Your exact percentage depends on which tax bracket you are in based on your overall income.
It is important to note that short-term losses outweigh short-term gains. So if you were to lose money on a short term investment, you would subtract it here, down to the full amount you earned.
If you are wondering how to handle capital gains tax in your own situation, contact a tax professional who can help you with the details.
Long-term capital gains
What are long-term capital gains?
If you hold an investment for more than a year before selling it for a gain, it is considered a long-term capital gain. For example, if you bought shares in GameStop on January 12th, 2020, and sold them on January 28, 2021, it is a long-term added value.
What if I owned and made long term gains?
Long-term capital gains in the United States are charged at a lower interest rate than short-term capital gains. Depending on your income, they are billed at a rate of 0%, 15% or 20%. Here are the current long-term capital gains tax rates:
2021 long-term capital gains tax rate
|Tax declaration status||0% rate||15% rate||20% rate|
|Only||Taxable income up to $ 40,400||$ 40,401 to $ 445,850||Over $ 445,851|
|Married spouse filing||Taxable income up to $ 80,800||$ 80,801 to $ 501,600||Over $ 501,601|
|Marriage filed separately||Taxable income up to $ 40,400||$ 40,401 to $ 250,800||Over $ 250,801|
|Head of household||Taxable income up to $ 54,100||$ 54,101 to $ 473,750||Over $ 473,751|
TABLE CREDIT: Forbes (Kate Ashford and Benjamin Curry)
It is important to note that long-term losses only compensate for long-term gains. If you lose money on a long-term investment, you would subtract it here from the full amount you earned.
Again, if you are wondering how to handle capital gains tax in your own situation, contact a tax professional who can help you with the details.
Implications of the earned income tax credit
What is the income tax credit?
Another important aspect of taxing GameStop’s profits is the Income Tax Credit (EITC). The EITC is a tax credit granted to low and modest income households, especially those with children. it’s a real tax credit, which means it reduces the amount of taxes you owe the IRS. This can result in either a much lower tax bill or a much larger refund.
There are many rules for qualifying for the EITC. The biggest requirement is that the minor income is relatively low, but the eligibility threshold increases dramatically for every child in your household. Plus, the amount you can claim increases dramatically if you have children, up to $ 6,728 in 2021 if you have three or more eligible children.
How investment gains affect the EITC
There is one big downside to this EITC, however. Your total investment income must be $ 3,650 or less to qualify. So if you have more than one qualifying child and would otherwise qualify for the EITC, if you only slightly exceed that threshold, you will actually lose money because the tax credit is greater than your total investment income.
What if I lose the EITC?
If you lose the EITC solely because of your investment gains, that means you will have to pay a bigger tax bill than you would otherwise have. If you are near the threshold a small investment loss would take you below that level, so you may want to consider making another small investment so that if you lose money on it you at least get your money back. EITC for the following year. .
For example, if you qualified for the EITC in 2020 and it looks like you will be there again in 2021 – except you earned $ 4,000 in investment income – consider using some of your income investment to invest in other short-term investments. . If it pays off, then your investment income is high enough that losing the tax credit isn’t a big deal. If these show a loss, sell them when they would bring your total investment income to less than $ 3,650. It is not worth doing this if you have very large investment income, as you would have to lose a lot of money in investments to recoup a fairly small tax credit; it only makes sense if you are close to the cutoff.
If you are affected by the EITC in your particular situation, consult a tax expert. They can help you sort out the details of your own tax situation.
Make a plan before you spend
Either way, if you’ve made any investment income betting on Wall Street, congratulations! However, rather than splurging on that money, consider using it in a way that will make things better for you in the future.
First of all, make absolutely sure that you have set aside a lot of money for taxes. Since this is likely a short-term capital gain, you’ll want to use a tax calculator to see how much tax you’ll owe when you file in 2022. Intuit’s tax calculator will help you get this. a rough estimate of your tax bill. . Just make sure you keep at least that part of your income.
This is the most important thing because you don’t want to end up with a tax bill in April.
As well: Seven Life-Changing Ways to Use Your Tax Refund
Build an emergency fund and pay off debts
What about the rest of your investment income? You should start by taking steps to strengthen your financial foundation so that you can deal with whatever life throws at you – illness, job loss, or some other unforeseen event. Start by creating an emergency fund, which is just a stash of money stored in a savings account for unforeseen events. A good amount to store is at least a month of living expenses.
Once that is in place, pay off your debts. First and foremost, make sure you are up to date on all of your invoices. Then, come up with a debt repayment plan to help you figure out which debts to pay off first, and make a big extra payment on the one at the top of the list. If you’ve been really successful, pay off the debts in full by following the list. Watching credit card debt and student loans vanish into thin air is a lasting burden on your shoulders.
Building a financial base
What if you have an emergency fund and have no debt (or have very low interest debt left over)? There are options to consider when deciding what to do with your new money. Consider using this money to build a lasting financial foundation for you and your family.
Identify your long-term goals. Do you want to own a house? Do you want to pay for your child’s college education? Do you want to take early retirement? Determine what’s important to you in your life, then seek specific financial advice on how best to invest to achieve that goal.
[This article was originally published on The Simple Dollar in February 2021. It was updated in December, 2021.]