How turning a profit on GameStop will affect your taxes
If you squeezed a quick profit on stocks like GameStop, Uncle Sam may be taking a slice of it.
GameStop stock leveled up by more than 400% this week, causing some investors to storm the markets with hopes of turning a quick profit. But it could mean a higher 2021 tax bill, especially as President Biden plans to increase the capital gains tax on the highest earning investors.
What is a capital gains tax?
A capital gains tax is a tax that you pay on your investment earnings.
When you sell an asset such as a stock for more than you bought it for, you owe a capital gains tax. This is Uncle Sam’s cut on your investment earnings, or what he calls a “capital gain.”
The capital gain is the difference between the price at which you sold your stock for and the price at which you bought it for.
How capital gains taxes work
The tax rate that you pay on your capital gain depends on how much you earn and how long you held onto the investment before selling it for a profit. Preferably, you’d want to hold onto your stock for more than a year before selling it to get the more favorable long-term capital gains tax rate.
But if you just made a quick profit by selling shorted stocks like GameStop and AMC, you’d be taxed at your ordinary income tax rate based on federal income tax brackets. Under current law, federal income tax rates for 2021 range from 10% to 37%, depending on your income.
|Income||Short-term capital gains tax rate|
|$0 to $9,950||10%|
|$9,951 to $40,525||12%|
|$40,526 to $86,375||22%|
|$86,376 to $164,925||24%|
|$164,926 to $209,425||32%|
|$209,426 to $523,600||35%|
|$523,601 or more||37%|
But if you’ve held onto your stock for more than a year before selling it and made a profit, you’d owe a long-term capital gains tax. This would also depend on your income.
|Income||Long-term capital gains tax|
|$0 and $40,000 pays a 0%||0%|
|$40,000 and $441,450||15%|
It’s important to note that your income for federal tax purposes includes your capital gain. In other words, the profit you made from selling your stock is considered income for the year you sold it. So if it pushes you up a bracket, your capital gains tax will shift accordingly.
Capital gains taxes by state vary and currently range from 13.3% in California to 2.9% in North Dakota.
And for long-term capital gains taxes, you may need to add on a 3.8% Affordable Care tax.
Biden tax plan
When President Joe Biden ran for office, he proposed to increase the long-term capital gains tax rate of 20% to 37% for the highest earners.
Short-term capital gains taxes are based on rates set by President Trump’s Tax Cuts and Jobs Act, which are set to expire in 2025. However, President Biden wants to increase the top federal tax rate of 37% to 39.6%.
Calculating your capital gains tax
First, let’s start with your income. Let’s say your income puts you in the 15% federal income tax bracket. You bought a share of stock for $20. You sell it for $1,000 less than a year after you purchased it.
So your capital gain is $980. That means that a 15% tax on $980 equals a $147 capital gains tax.
How to file capital gains taxes
To report capital gains tax, you’d need to fill out a few forms.
You’d need Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or an equivalent statement. You’d also need Form 1040, Schedule D, Capital Gains and Losses. But the best tax software can make this process a lot easier.