Let’s say a high-income investor bought 100 GameStop shares on January 4, when the shares traded at $ 17.25, paying $ 1,725. The broker then sold the shares on January 27, when they reached $ 347.51, reaping $ 34,751, with a gain of $ 33,026. The tax bill, for someone in the highest income bracket, would be estimated at $ 13,475.
And these are just federal taxes. Many states and cities assess their own capital gains taxes or treat capital gains as ordinary income, which is taxed at higher rates.
Some GameStop traders indicated that they bought shares in 2019 and held them for more than a year. In that case, they would be eligible for favorable long-term capital gain tax rates if they realized a gain on the sale. The maximum rate would be 20%; those who earn more would also pay 3.8% more, for a rate of 23.8%.
Individual traders may also experience capital losses if they sell a stock for less than they paid for it, which can be used to offset capital gains and reduce taxes, said Tony Molina, a certified public accountant and senior product specialist at Wealthfront , an online investment service.
Less experienced investors can sometimes conflict with tax rules with so-called “washing sales”. In this scenario, an investor with a large capital gain in the sale of the shares of a company seeks to generate losses to offset the tax account. Thus, the investor sells shares of a different stock at a loss – but then buys them back. This is a no, no.
“You can’t do that,” said P. Evan Stephens, a tax partner at Sensiba San Filippo in San Jose, California. If you buy back the same or similar shares within 30 days, he said, the loss generated to offset your gain.
On the radar is a proposal by President Biden to eliminate the favorable rate of long-term capital gains for taxpayers who earn more than $ 1 million and increase the maximum rate for ordinary income. There have already been rumors that the changes, if approved, could be retroactive to the beginning of 2021. “Is it likely? No, ”said Tim Speiss, partner of EisnerAmper’s personal wealth group. “Could this happen? We do not know. “