Say a high-income investor bought 100 shares of GameStop on January 4, when the shares traded at $ 17.25 and paid $ 1,725. The trader then sold the shares on January 27 when they reached $ 347.51, which raised $ 34,751, at a profit of $ 33,026. The tax bill for someone in the top income group is estimated at $ 13,475.
And this is just federal tax. Many states and cities rate their own capital gains tax or consider capital gains as ordinary income, which is taxed at higher rates.
Some GameStop traders have indicated that they bought shares in 2019 and have owned them for more than a year. In that case, they would be eligible for favorable capital gains tax rates in the long run if they made a profit on the sale. The highest rate would be 20 percent; higher earners also pay the extra 3.8 percent for a rate of 23.8 percent.
Individual traders can also have capital losses if they sell a stock for less than what they paid for it, which can be used to offset capital gains and reduce taxes, said Tony Molina, a certified public accountant and senior product specialist at Wealthfront, a online investment, said service.
Less experienced investors can sometimes be taxed with so-called ‘laundry sales’. In this scenario, an investor with a large capital gain on the sale of one company’s shares wants to generate a loss to reimburse the tax bill. The investor therefore sells shares of another stock at a loss – but then repurchases the stock quickly. It’s a no no.
“You can not do that,” said P. Evan Stephens, a tax partner at Sensiba San Filippo in San Jose, California. If you repurchase the same or similar stock within 30 days, you will not be able to use the loss generated to recoup your profit.
On the radar is a proposal by President Biden to eliminate the favorable long-term capital gains rate for taxpayers earning more than $ 1 million and to increase the highest tax rate for ordinary income. There are even rumors that the changes, if approved, could be made retroactive to early 2021. ‘Is that likely? No, ”said Tim Speiss, a partner at EisnerAmper’s personal wealth group. “Can it happen? We do not know. ”