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Investors who admire the high returns on GameStop shares may be in for a surprise: a huge tax collection.
GameStop’s share price has increased by more than 1,700% from the beginning of the year until the close of Wednesday. It rose 130% on Wednesday to almost $ 348 a share. The video game retailer’s shares were priced at $ 39 per share just a week earlier.
Shares in AMC and Bed Bath & Beyond also rose this week, fueled by extreme speculation among retail traders.
But Uncle Sam will also profit from investors’ fortunes.
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GameStop buyers who sell their shares owe capital gains tax on any winnings. Say, for example, that an investor sells the shares at a profit of $ 1,000. These $ 1,000 are subject to tax. It would be due in the 2021 tax return season if sold this year in a taxable account.
The total amount will depend on many things, including the investor’s income and the length of time the investor has owned the shares.
The wealthiest taxpayers will give up almost a quarter of their earnings, at least, and possibly more than 40% to the federal government. States may take even longer.
Obviously, investors can choose to maintain their investments, in which case they should not be required to pay taxes.
Those who sell at a profit – and pay the taxpayer – can still take comfort in the fact that, in the end, they have made money.
“If you’ve had a great run, there’s always an easy way to avoid paying taxes – and that’s losing all of your money,” said certified financial planner Jeffrey Levine, director of planning at Buckingham Wealth Partners in Long Island, New York. “Having most of anything is always better than anything at all.”
Long-term capital gains
The federal government taxes long-term capital gains (those from an investment held for more than a year) at favorable rates over the typical income tax.
For example, wealthier Americans pay a higher tax rate of 23.8% on these stock returns (a 20% capital gains tax plus a 3.8% Medicare surcharge on investment income). However, they pay a maximum rate of 37% on wages.
Low- and middle-income people can pay a smaller portion – 15% or possibly nothing, depending on their annual taxable income.
Short-term capital gains
But the bite would be greater for those who sell shares after only a brief possession.
They would pay short-term capital gains fees, which apply to investors who sell a stock after a year or less. They are equal to a person’s income tax rates.
Uncle Sam would take 40.8% of GameStop earnings from the wealthiest investors in this case, instead of 23.8%. (This includes a higher income tax rate of 37% and a Medicare surcharge of 3.8%.)
Most states tax capital gains as ordinary income – meaning that long-term investors do not obtain a favorable tax rate.
Harvesting tax loss
Investors can limit their tax collection using a strategy called “harvesting tax losses”.
Investors would deliberately incur losses on a taxable account by selling investments whose value has fallen. In doing so, investors can offset the capital gains on the valued assets they sold.
However, there are warnings and possible pitfalls for the unwary.