Buzz
With commission-free brokerage platforms and stock trading apps like Robinhood becoming more popular, millions of first-time traders might not be ready for the tax implications of their trades next year.
If you’re new to stock trading, you might not realize how your trading account affects your taxes. For example, Robinhood provides a taxable brokerage account, unlike tax-deferred options like your 401(k). Here's the thing: Each time you sell a stock, it could directly affect your taxes. If you've been trading stocks through one or more apps, especially while staying at home, these important tax tips are a must-know.
Tax Implications of Investment Income
You can earn investment income by selling stocks at a profit or receiving dividends, and this income is taxed differently from your salary. The key difference lies in the capital gains rates, which depend on how long you hold the stock. If you hold a stock for at least a year and then sell it for a profit, you'll pay long-term capital gains tax, usually not exceeding 15%. This might be lower than your regular income tax, depending on your tax bracket. However, if you sell a stock within a year for a profit, you may face short-term capital gains tax, which is taxed at the same rate as your ordinary income tax.
You may be required to pay quarterly estimated taxes
Since taxes in the U.S. follow a pay-as-you-go system, you might need to pay quarterly estimated taxes as you profit from stock sales. You can use this worksheet to figure out how much you owe, or you might want to consult a tax professional for help.
You can offset capital gains with capital losses
As the year ends, you may have the opportunity to reduce some of your capital gains by offsetting them with capital losses from other stocks. Capital losses follow the same timeframes as short-term and long-term capital gains, but to benefit, you must 'realize' those losses by selling the losing stocks before the year ends. For more details on net capital gain or loss tax rules, visit here—and consider consulting a tax expert if you’re uncertain.
You can deduct some of your capital losses
If your capital losses surpass your capital gains, you can deduct up to $3,000 (or $1,500 if married and filing separately) of your losses from your ordinary income. For further details on how to deduct capital losses, refer to Schedule D.
