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Investors who are baffled by the significant returns on GameStop shares may be in for a surprise – a big tax bill.
GameStop stock prices have risen more than 1,700% since the beginning of the year until Wednesday’s close. It rose 130% on Wednesday to nearly $ 348 a share. The video game retailer’s shares cost $ 39 per share just a week earlier.
Shares of AMC and Bed Bath & Beyond also rose this week, driven by extreme speculation among retailers.
But Uncle Sam will also benefit from the fortune of investors.
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GameStop buyers who sell their shares will have to pay capital gains tax for any profit. Let’s say, for example, that an investor sells the shares with a profit of $ 1,000. That $ 1,000 is subject to tax. It would expire in the 2021 tax filing season if sold this year in a taxable account.
The total amount will depend on many things, including an investor’s income and the length of time the investor has owned the shares.
Wealthiest taxpayers will cede nearly a quarter of their income, at least, and possibly more than 40% to the federal government. States can take even longer.
Of course, investors can choose to keep their investment, in which case they would not owe taxes.
Those who come for a profit (and pay the prosecutor) can still console themselves that they eventually made money.
“If you’ve had a really great career, there’s always an easy way to avoid paying taxes, and that means losing all your money,” said certified financial planner Jeffrey Levine, chief planning officer at Buckingham Wealth Partners in Long Island, New York. “Having most of something is always better than nothing.”
Long-term capital gains
The federal government taxes long-term capital gains (those derived from an investment held for more than a year) at favorable rates relative to typical income taxes.
For example, wealthier Americans pay a higher tax rate of 23.8% for these share returns (20% capital gains tax plus 3.8% of Medicare tax revenue). investment income). However, they pay 37% of salaries.
Low and middle wage earners can pay a lower share: 15% or possibly nothing, depending on their annual taxable income.
Short-term capital gains
But the bite would be bigger for those who sell shares after a short property.
They would pay short-term capital gains rates, which apply to investors selling shares after a year or less. They are the same as the personal income tax rates.
Uncle Sam would take 40.8% of GameStop profits from the wealthiest investors in this case, instead of 23.8%. (Includes an income tax rate of more than 37% and a Medicare supplement of 3.8%.)
Most states tax capital gains as ordinary income, meaning long-term investors do not get a favorable tax rate.
Collection of tax losses
Investors can limit their tax bill through a strategy called “harvesting tax losses”.
Investors would deliberately suffer losses in a taxable account by selling investments that have fallen in value. By doing so, investors can offset the capital gains from valued assets they have sold.
However, there are warnings and possible pitfalls for the unwary.