Tax season can get confusing when your assets are distributed across multiple accounts and investments. The taxes you pay on stocks will depend on how your shares are held and what you do with them. If you’re already an active or day trader, you may also be considering the benefits of long-term stock investments.
As you research your investment options, make sure you understand the essential information about how stocks are taxed.
When Can I Be Taxed on Stocks?
Capital Gains
One of the most important tax considerations for stockholders is capital gains tax. Capital gains generally occur when you sell a stock for more than its adjusted cost basis. Under the standard capital gains rules, the difference between the sale proceeds and the adjusted cost basis determines your taxable gain.
Please note: The Mark-to-Market election under Section 475(f) does not work this way. Traders who have made a valid Mark-to-Market election are subject to different rules for recognizing gains and losses on securities covered by that election.
Dividends
Some shareholders receive distributions of cash or stock from publicly traded companies, commonly referred to as dividends. Dividends are generally reportable for tax purposes, although their treatment depends on the type of dividend received. Ordinary dividends are generally taxed at ordinary income tax rates, while qualified dividends may be eligible for the lower long-term capital gains tax rates of 0%, 15%, or 20%, depending on the taxpayer’s income and filing status.
When Can I Claim Stocks as a Tax Deduction?
Under the standard capital gains rules, capital losses can generally be used to offset capital gains. If your losses exceed your gains, you may be able to deduct up to $3,000 in net capital losses against other taxable income annually ($1,500 if married filing separately). Additional unused capital losses may generally be carried forward to future tax years. Different rules apply to securities covered by a valid Mark-to-Market election.
Another potential tax benefit involves donating appreciated stocks to a qualified charitable organization. Depending on how long you’ve held the shares and other applicable requirements, you may be eligible to deduct the fair market value of the donated stock. Donating appreciated shares directly may also allow you to avoid recognizing the capital gain that would otherwise result from selling those shares. Charitable contribution limits and other IRS requirements apply.
For help planning your tax strategy as an active or business trader, contact Traders Accounting for a free consultation. Our tax professionals can help you understand the tax considerations associated with your trading activities and identify planning opportunities appropriate to your situation.