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Investors trying to make a strong income from GameStop stocks could be a surprise: a big tax bill.
The price of GameStop shares rose by more than 1,700% from the beginning of the year until the end of Wednesday. It rallied 130 percent to nearly $ 348 a share on Wednesday. The shares of the video game retailer cost $ 39 per share just a week earlier.
Shares of AMC and Bed Bath & Beyond also rose this week, fueled by extreme speculation among retailers.
But Uncle Sam will also take advantage of investors’ fortunes.
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GameStop buyers who sell their shares will owe capital gains tax on any earnings. Suppose, for example, that an investor sells the shares for a profit of $ 1,000. $ 1,000 is subject to tax. It would be due in the 2021 tax filing season if it were sold this year in a taxable account.
The total amount will depend on many things, including the income of an investor and the period in which the investor held the shares.
The richest taxpayers will give up almost a quarter of their earnings, 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 should not owe taxes.
Those who sell for a profit – and pay the tax – can still be comforted that they have made money in the end.
“If you’ve had a really great run, there’s always an easy way to avoid paying taxes – and you lose all your money,” said certified financial planner Jeffrey Levine, chief planning officer at Buckingham Wealth Partners in Long Island, New. York. “Having the majority of something is always better than having nothing.”
Long-term capital gains
The federal government taxes long-term capital gains (those from an investment held for more than a year) at rates favorable to typical income taxes.
For example, the wealthiest Americans pay a maximum tax rate of 23.8% for these stock returns (a 20% capital gains tax plus an additional 3.8% tax on Medicare investment income). However, they pay a maximum rate of 37% on salaries.
People with low and medium incomes can pay a lower share – 15% or probably nothing, depending on their annual taxable income.
Short-term capital gains
But the bite would be bigger for those who sell shares after only a short property.
They would pay short-term capital gain rates, which apply to investors selling a share after a year or less. They are the same as personal income tax rates.
Uncle Sam would take 40.8% of the GameStop earnings of the richest investors in this case, instead of 23.8%. (This includes an income tax rate of 37% and an additional 3.8% tax for Medicare.)
Most states impose capital gains as ordinary income – meaning long-term investors do not receive a favorable tax rate.
Harvesting tax losses
Investors may be able to limit their tax bill using a strategy called “tax loss collection”.
Investors would deliberately incur losses in a taxable account by selling investments that have decreased in value. By doing so, investors can offset the capital gains from the valued assets they have sold.
However, there are potential warnings and pitfalls for the inexperienced.