Can someone clarify or correct the capital gains tax thoughts below. I know some of you are pretty savvy on this.
If I buy stocks this year and make say $5,000 and sell them in 2012 (or even within 366 days), I claim the $5,000 as income and pay the standard tax rate on them.
Same scenario, except sell them after the 366 days, I only pay 15% tax on the $5,000 unless my income tax bracket a low one.
How are the gains calculated? In that scenario, the $5,000 profit from selling stocks is counted as a gain as soon as I sell or do I need to move the money into a bank account of some sort?
Correct. Short term capital gains are taxed at your marginal tax rate.
Correct (barring any complicating circumstance)
Gains = Net proceeds less cost basis (which should be reported on 1099-B’s from here on out). Cost basis would include your brokerage fees. It’s a realized gain (and therefore taxable) when the sale is made. Technically, the tax on the sale won’t be due until your personal income tax return is due the following April in the year after the sale occured (that being said, if the gain is substantial enough and early enough in the year, you could be hit with an underpayment penalty for not paying estimated tax during the year. For your example, using $5000, it probably would be a huge problem).
So hypothetically, if I bought some stocks and sold them in the same month for a profit of $5,000 minus an brokerage fees, and let the money sit in the account, its taxable at the sale. How would it work if I reinvested that $5,000 into another stock?
I guess that is where I am confused on when the gains tax applies and how its calculated if I buy and sold using the “gain”
You have to declare all the positions you closed within that tax year. Gains you pay tax on, losses, platform fees and commission fees you write off.
There is a “wash” rule where you can’t keep investing in the same stock and have multiple write offs on multiple losses.
Other than that stocks are pretty straight forward tax wise.
Cliffs: Your capital gains are a tight little virgin butthole and here comes the governments with it’s drunk on with that rapey look in it’s eye.
Do the smart thing. When your taxes start involving more than a 1040 and some student loan interest get yourself a tax guy you can trust and make his advice part of your investing strategy.
I would say step one is to just make the gains haha. I always am a huge advocate of the “teach a man to fish” policy with taxes (I hold the same policy with cars and computers…something most of us will use every single day of our lives). I’ll explain any taxation concept to someone as I think it’s important and something that you will deal with every single day.
That being said…Jay S is right, but I would say that taxes shouldn’t realllllly start impacting your investing strategy until you get into the high net worth category. A sound investment is a sound investment regardless and shouldn’t be based on taxes.
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Not tedious…the brokerage will basically hold your hand and do it for you. I would brush up on wash sales though as TraderBASE said. There are different rules for dividend reinvesting (although I don’t think you’re talking about that at all).
---------- Post added at 08:47 AM ---------- Previous post was at 08:47 AM ----------
Not tedious…the brokerage will basically hold your hand and do it for you. I would brush up on wash sales though as TraderBASE said. There are different rules for dividend reinvesting (although I don’t think you’re talking about that at all).
100’s of trades = no fun and googly eyes at the end of logging the data. LOL
Luckily I never double dipped on anything used as a write off, never had to pay much attention to wash rules myself…I just know a lil about them.
Jay is right, if you’re actively trading or have more than a 1040 you’ll probably get the fees back in loopholes normal folks don’t know about, try an accountant perhaps.
Haha ya. I do my own taxes since I only have my income, some consulting writeoffs and income, and student loan interest. I just wanted to make sure a shorter term strategy for investing wasn’t gonna kill me and any gains was just taxed as income and not some random penalty or 50% rate.
I think this year, if I do 5 trades I would consider that a lot. Haha.
If you’re doing 1099 work I’d be willing to bet a decent tax guy could find you enough tax savings to more than pay for his fee. When I was doing side work mine had me set up a dedicated use home office space so I would write off a portion of a lot of home costs. A good tax guy can help steer you toward how much space you can claim is exclusive use business (and therefor claimable) without raising red flags with the IRS. Other great tips I got were business lunches under X dollars without receipt (just keep a log), mileage logs etc etc. There’s a lot of stuff the tax guy in a box isn’t going to teach you about.
I have someone who does freelance stuff for years. I got a lot of the tips from him on what I can and can’t write off. Since my 1099 business isn’t huge, I don’t write off much other than a small amount of my apartment, miles, and a new laptop that I use more than 1/2 for work. Also, any lunch under $25 you don’t need receipts for, just a log. I am sure a professional can maybe get me a little more which I may use this year since I am doing more 1099 work and have a startup to deal with.
Home office expense IS a red flag at any level. I like to weigh the pros and cons when considering taking all the little extra expenses. Do you keep a mileage log, is the piece of your apartment used SOLELY for business. My point is…VERY few people keep good enough records to actually hold up to IRS audit or court. Is it worth adding in the “red flag” expenses when you open yourself up to so much risk (ie. scrutiny of every payment hitting your bank account that might not even be business income {assuming that you don’t keep a separate bank account for consulting}).
I agree. I had very little write offs due this this fact. I had a work area so of my last years apartment that was 1000 sqft, I only wrote off a small percentage of the total utilities and rent as being home office and even didn’t bother taking as much as I probably could have because of the risk. This year with moving, I dropped the shared expenses such as car/rent/etc. and just wrote off miles, some meals for meetings and training, my laptop, and clothing since I changed jobs in my full time career. If things keep growing this year, I will probably buy a computer only for business and have a separate account that all expenses and cash flow for business comes out of for easier record keeping. Again, I am no where near that point yet and if I did get audited, I only wrote off what I have documentation to prove on the business side of things just to avoid any unneeded stress to save a $100 in tax dollars. With electronic banking, anything coming into my account is recorded such as checks and stuff so it makes it really easy to show where a check came from and if it was a personal gift or a source of income.