To say that the stock market rally has been impressive in the last few months would be a great understanding. This is especially true when it comes to some of the most popular tech stocks in the market. Apple (NASDAQ: AAPL) And Tesla (NASDAQ: TSLA) Two in particular are that many investors have made big gains recently, but many other high-flying tech stocks have made investors a lot of money in recent months.
If you sold any of your big stock market winners after a recent rally and made a big profit, there could be some big implications as tax time rolled. Here is a quick guide you need to know.
Is your sales taxable?
The first question you need to answer is whether your sale is potentially a taxable event. Did you own the stocks (shares) sold in the retirement account like the IRA or did you hold them in a standard (taxable) brokerage account?
If you have sold the shares you own in a retirement account, you don’t have to worry – unless you plan to immediately withdraw income to a tax-removed account such as a traditional IRA. As long as you leave money in the account, the sale of stock in retirement accounts is not subject to capital gains taxes, no matter how much profit has been earned. For example, I recently sold half of my Apple stock at a substantial profit, but since the situation was in my Solo 401 (k) account, I wouldn’t have to worry about the tax implications as long as I’m off the account Does not withdraw money.
Therefore, if you sold the stock at a profit in your retirement accounts, the short answer is that your 2020 tax return will not be affected until you actually withdraw money.
Long or short term?
Assuming that you have owned the stock (s) sold in the taxable account, the next question is how long have you owned them.
When it comes to capital gains tax, the IRS has two categories: short or long term. Here is the difference:
- A short-term capital gain is when you sell an asset that you have for a year or less. This type of benefit is taxed as ordinary income, as if you earned it from a job. In other words, if your marginal tax bracket is 22%, then this is the rate you will pay on short-term capital gains.
- Long-term capital gain is when you sell an asset that you have for more than a year. Long-term gains receive preferential tax treatment, with most Americans paying a 15% rate and 0% and 20% capital gains respectively, and brackets for high-income taxpayers.
In addition to these, some high-income investors pay an additional 3.8% net investment income tax, regardless of the period of investment.
Losing investment can make up for your profit
It is also important to state that investment profits are not taxed on a stock-for-stock basis. The IRS assesses the tax on your net capital gains for the year. In other words, investment losses can offset the investment gains.
Consider this simplified example. Suppose you just sold a bunch of Tesla stock at a short-term profit of $ 5,000. However, you also sold another stock at a loss of $ 2,000 when the market crashed in March. You will only have a taxable profit of $ 3,000.
It is a bit more complicated than this. For one thing, long-term gains should be used to offset long-term gains before they can be applied to short-term gains and vice versa. And even if you have no capital gains, investment losses can be used to reduce your other taxable income by $ 3,000.
Also, as the end of the year draws to a close, you can revisit your portfolio to see if you are sitting on an investment that you want to sell to reduce your tax bill. This is actually a popular strategy known as tax-loss harvesting, and it can significantly reduce your taxes if you win the investment.
The irs knows
As a final consideration, you do not have to worry too much about calculating your capital gains by hand. Your broker will send you a tax form (usually a consolidated 1099) that includes your profits and losses, dividends, interest income, and many tax information.
And here is the point you really need to know: Your broker also sends a copy of this form to the IRS. So, the IRS knows when you have made a big investment profit. Do not think that you cannot report it and avoid taxes. Failing to report a large investment return is a quick way to conduct an audit.