Many people want to learn how to invest nowadays, except taxes on stocks. The rise of Robinhood and other trading apps piqued curiosity for investments. While learning how to maximize profits, they typically forget the taxes attached. Before you start investing, learn how its taxation works.
We’ll begin by defining the kinds of taxes on stocks. We’ll explain relevant details, including tax rates. Next, we’ll discuss how to calculate, file, and submit your taxes. More importantly, we’ll tackle the importance of taxation, particularly its significance for maintaining society and protecting citizens.
If you want to invest, you should do it responsibly. As a citizen, you have to follow your country’s laws. This means you must pay taxes on stocks once you’ve bought some. As you’ll soon discover, taxation serves an essential purpose, enabling the government to perform its duties.
What is capital gains tax?
Besides earning dividends, investors profit from stocks by selling them. They purchase stocks then wait for them to gain value. Once this happens, they sell the shares.
As a result, they profit from the difference between its purchase price and its sell price. It’s otherwise known as capital gains. This is where one of the taxes on stocks is derived.
This means investors only have to pay capital gains tax if they sold stocks. If they just held the stocks for any period, they won’t have to submit this kind of tax.
In contrast, investors incur capital losses if they sell stocks at a lower value than what they paid. More importantly, these could be deducted from your capital gains tax.
Short-term capital gains tax
There are two types of capital gains tax depending on how long you’ve held stocks. How capital gains are taxed also relies on the duration you’ve saved those assets.
If you’ve only owned them for a year or less, you must pay short-term capital gains tax. These follow the same rate as your regular income.
Check your income and filing status to find out your corresponding tax rate. Here is the list of short-term capital gains tax rates for 2020:
| Tax Rate | 10% | 12% | 22% | 24% | 32% | 35% | 37% |
| Filing Status | Taxable Income | ||||||
| Single | Up to $9,875 | $9,876 – $40,125 | $40,123 – $85,525 | $85,526 – $163,300 | $163,301 – $207,350 | $207,351 – $518,400 | $518,400 |
| Head of household | Up to $14,100 | $14,101 – $53,700 | $53,701 – $85,500 | $85,501 – $163,300 | $163,301 – $207,350 | $207,351 – $518,400 | Over $518,400 |
| Married couple (filing jointly) | Up to $19,750 | $19,751 – $80,250 | $80,251 – $171,050 | $171,051- $326,600 | $326,601 – $414,700 | $414,701 – $622,050 | Over $622,050 |
| Married couple (filing separately) | Up to $9,875 | $9,876 – $40,125 | $40,126 – 85,525 | $85,526 – $163,300 | $163,301 – $207,350 | $207,351 – $311,025 | Over $311,025 |
Long-term capital gains tax
Hold on for more than a year, and you’re required to pay long-term capital gains tax instead. If you’re in a lower tax bracket, you could pay zero long-term taxes on stocks.
On the other hand, high-income earners could save significantly from the long-term capital gains rate. They may deduct 17% off the regular income tax rate.
Here are the long-term capital gains tax rates for 2020:
| Taxable Income per tax rate | |||
| Filing Status | 0% | 15% | 20% |
| Single | Up to $40,000 | $40,001 to $441,450 | Over $441,450 |
| Head of household | Up to $53,600 | $53,601 to $469,050 | Over $469,050 |
| Married filing jointly | Up to $80,000 | $80,000 to $496,600 | Over $496,600 |
| Married filing separately | Up to $40,000 | $40,001 to $248,301 | Over $248,301 |
Although, there are significant exceptions to long-term capital gains tax. First, you’ll be taxed 28% for profits from collectible assets such as antiques, no matter how long you’ve owned them.
Second, net investment income tax (NIIT) is another exception to taxes on stocks. It adds a 3.8% surtax to investment gains from estates and trusts past a specific threshold.
Dividend tax and interest income tax
Aside from selling stocks for profit, investors earn dividends from them too. Consequently, the government charges more taxes on stocks from these earnings.
First, investors receive income as interest, and the government taxes it at their ordinary income tax rate. This particular tax on your investment is also known as interest income tax.
Second, they earn from unqualified dividends that follow the ordinary income tax rate as well. Though, some dividends may receive special tax treatment.
For more information, you may ask your investment brokerage. It should help you discern if your dividends are eligible or not.
How to file and submit tax payments
After exploring basic information regarding taxes on stocks, it’s time to file tax returns. Check the Internal Revenue Service (IRS) website for assistance in filing taxes.
It facilitates filing for various tax purposes, from income taxes to capital gains taxes. Select your preferred option, then click your specific tax type.
Unfortunately, most people struggle to calculate their tax bills accurately. You must ensure you’re filing and computing your taxes correctly, or the IRS might penalize you.
Thankfully, the internet provides multitudes of services for specific tasks. For instance, online credit card calculators help folks with their debt payoff.
For taxes on stocks, you may search for free capital gains calculators online. However, the paid tax software options have greater functionality than the no-cost alternatives.
The importance of paying taxes
Many people loathe paying taxes on stocks and everything else. Sadly, they fail to realize the significance of taxation for preserving modern society.
It makes sure that companies provide safe products and services. Without tax regulations, some businesses may skimp on quality control to squeeze more earnings.
Also, taxes prevent businesses from abusing the environment. Taxation ensures that brands minimize their negative impact on natural resources.
Moreover, we pay taxes on utilities to ensure reliable access. For instance, it would be challenging to pay firefighters first before dousing a house fire.
What’s more, taxes on stocks and payroll are equitable. This means they’re intended to charge an amount people could pay. Consequently, we pay in percentages instead of set amounts.
More importantly, taxes are meant to help when we’re in dire need. For instance, payroll taxes may help taxpayers with unemployment benefits if they ever lose their jobs.
Final thoughts
Investors pay taxes on stocks and other investments. If you want to start investing, too, be aware of the tax requirements. We must all follow the law or face corresponding penalties.
Our guide just showed the basics of investment taxes. If you need to learn more tax jargon like tax liabilities and taxable income, please refer to the IRS website.
Remember, gaining and maintaining wealth isn’t just about investments. Above all else, people should manage personal finance appropriately.
In other words, you should learn effective money management and spending habits. Luckily, you could check out numerous personal finance tips on the internet.
