Made Money on GameStop this year? Put some away for taxes!
Made Money on GameStop this year? Put some away for taxes!
Stop trading is all over the news recently because many retail investors are pushing up the price of GameStop much to the dismay of billion-dollar hedge funds. If you were fortunate and crazy enough to get in on this action, you may have made some money trading stocks in 2021. Today, we're going to walk through a very simple example of how taxes are going to work on the stock trades when you file next year.
Let's start with a few assumptions:
Our investor bought one share at $200
They then sold that share when the price was $350, within a few days of the initial purchase.
Their AGI is $60,000 so they are in the 22% tax bracket
They made no other stock purchases or sales during the year.
The first thing to take note of is that the purchase and sale of the security occurred within one year of each other. This is particularly important for tax purposes because the gain on the sale is treated as a short-term capital gain.
Short term capital gains may be offset by short-term capital losses. In this case, the only activity during the year is the short-term capital gain of $150, which is the difference between the cost basis (what the security was bought for) and the sale price. Short-term capital gains are taxed at your marginal tax rate, commonly referred to as your "tax bracket." Someone in the 10% tax bracket would expect to pay $15 for this transaction. Our investor is in the 22% tax bracket so they should put away $33.
Why Does This Matter?
In our relatively simple example, only one stock was traded for a gain of $150. In reality, you could be trading a lot more stocks and dealing with larger numbers. On top of that, many people simply forget to put away this money for taxes because it is not done for them. People are used to having their employer take out money for taxes on their paycheck, but investment apps don't do that when you have a capital gain. The difficulty many people encounter is that the money is right there in the account after they sold the stock, they could take it out and spend it or invest it in a different stock and not remember that they're going to need to pay taxes on it. Fortunately, cash is fungible, and you don't need to pay your taxes with the same money that you got from the sale of the stock. However, this means that a lot of people will get a surprise when they file their tax return and find out that they owe money.
So, if you made money stock trading during this historic time, be sure to put some of that money away to pay taxes later.