For example, suppose a high-income investor bought 100 shares of GameStop on Jan. 4 when the shares were trading at $ 17.25 and paying $ 1,725. The trader then sold the shares on Jan. 27 when they hit $ 347.51 and grossed $ 34,751, making a profit of $ 33,026. The tax bill for someone in the upper income bracket would be an estimated $ 13,475.
And that’s just federal taxes. Many states and cities value their own capital gains taxes or treat capital gains as ordinary income that is taxed at higher rates.
Some GameStop traders have stated that they bought shares in 2019 and held them for more than a year. If so, they would be entitled to favorable long-term capital gains tax rates if they made a profit on the sale. The top rate would be 20 percent; Higher earners would also pay the additional 3.8 percent for a rate of 23.8 percent.
Individual traders can also suffer capital losses if they sell a stock for less than they paid for it. This can be used to offset capital gains and lower taxes, said Tony Molina, accountant and senior product specialist at Wealthfront, an online investment service.
Less experienced investors sometimes violate tax regulations with so-called “wash sales”. In this scenario, an investor with a large capital gain from the sale of a company’s stock is trying to generate a loss to offset the tax burden. The investor sells shares in another share at a loss – but then quickly buys the share back. That’s a no no.
“You can’t,” said Fr Evan Stephens, a tax partner of Sensiba San Filippo in San Jose, California. If you buy back the same or similar shares within 30 days, you will not be able to use the loss incurred to offset your profit.
On the radar is a proposal from President Biden to eliminate the cheap long-term capital gains rate for taxpayers earning more than $ 1 million and increase the top tax rate on ordinary income. There were even rumors that if the changes were approved, they could be made retrospectively as of early 2021. “Is that likely? No, ”said Tim Speiss, partner in EisnerAmper’s personal asset group. “Could it happen? We do not know it. “