Killed in GameStop? Now comes the tax bomb
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Investors marveling at high returns from GameStop stocks may be surprised: a high tax burden.
GameStop stock is up more than 1,700% from the start of the year to Wednesday's close of trading. On Wednesday it was up 130% to nearly $ 348 per share. The video game retailer's stock was priced at $ 39 per share just a week earlier.
AMC and Bed Bath & Beyond stocks also rose sharply this week, thanks to extreme speculation among retailers.
But Uncle Sam will also benefit from the wealth of investors.
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GameStop buyers who sell their inventory owe capital gains tax on all profits. For example, suppose an investor sells the stock for a profit of $ 1,000. That $ 1,000 is taxable. It would be due in the 2021 tax return season if sold in a taxable account this year.
The total amount depends on many factors, including an investor's income and the length of time the investor owned the stock.
The richest taxpayers give at least nearly a quarter of their income and possibly more than 40% to the federal government. States can take even more.
Of course, investors can choose to hold their investment. In that case, they would not owe any taxes.
Those who sell for a profit – and pay the helmsman – can still comfort themselves that they ultimately made money.
"When you've had a really good run, there's always an easy way to avoid paying taxes – and that will lose all your money," said certified financial planner Jeffrey Levine, chief planning officer at Buckingham Wealth Partners in Long Island, New York. "Having the most of something is always better than having the most of nothing."
Long-term capital gains
The federal government taxes long-term capital gains (from an investment held for more than a year) at low rates compared to typical income taxes.
For example, the richest Americans pay a top tax rate of 23.8% on these stock returns (a capital gains tax of 20% plus a Medicare surcharge of 3.8% on capital gains). However, they pay a top wage of 37%.
Low- and middle-income earners may pay a smaller percentage – 15% or possibly nothing, depending on their annual taxable income.
Short term capital gains
But the bite would be bigger for those selling stocks after just a brief possession.
You would pay short-term capital gains rates that apply to investors who sell a stock after a year or less. They correspond to the personal income tax rates.
Uncle Sam would then take 40.8% of GameStop profits from the richest investors, instead of 23.8%. (This includes a top tax rate of 37% and a Medicare surcharge of 3.8%.)
Most states tax capital gains as ordinary income – which means long-term investors don't get a cheap tax rate.
Harvesting tax losses
Investors may be able to limit their tax burden through a strategy known as "tax loss harvesting".
Investors would purposely suffer losses in a taxable account by selling impaired assets. This allows investors to offset capital gains from the valued assets they have sold.
However, there are caveats and potential pitfalls for the unwary.