The tax implications of stock trading is a topic few investors spend time contemplating, but a sure fire way to wipe out profits is to fail to take tax consequences into consideration.
- Understand how earnings will be taxed: Long-term capital gains, short-term capital gains, or ordinary income. For the purposes of taxation, long-term is considered anything over one year. One day less and you don't qualify. In most cases, ordinary income will be taxed at the highest rate and investing profits can actually bump you into a higher tax bracket eliminating a major portion of what you earned.
- Understand when to pay taxes. Estimated taxes are due on the profit of stock sales by the end of the quarter in which the sale was made.
AMT. Did a shiver just run down your spine? With good reason. If your profits were sizable enough then it might trigger the Alternative Minimum Tax. Be prepared.
- State Taxes. Unless you are fortunate enough to reside in Florida or one of the few states without a state income tax, then don't forget to include state taxes into your calculations.
- Adjusted Gross Income. Depending upon your specific situation, your total earnings and investment profits might offset other deductions or anticipated tax shelters and benefits resulting in higher than anticipated taxation.
Finally, the tax implications of stock trading should be fully understood before undertaking any investment.