Taxation

One of the finer points of the stock market that often goes ignored is taxes.  I hate to be the bearer of bad news, but like everything else in life, the money that you earn from the stock market is taxable.  Even though stock market earnings are for some, especially retirees, an important source of income, only short-term earnings are taxed as ordinary income.  Luckily for investors, there are special tax breaks for long-term holdings. 

The IRS defines short-term holdings as those stocks held for one year or less.  Long-term holdings are anything held for over one year.  To reap the benefits of the lower tax rate on long-term investments, fill out Part II of Schedule D of Form 1040.  Short-term investments are reported on Part I of Schedule D.  This is where you will net short-term gains and losses.  If you have netted a short-term loss, this offsets a long-term gain in the same amount.  If short-term losses exceed long-term gains, the amount lost is deductible up to $3,000. 

Hopefully, you will report an overall earning for the year once you combine short and long-term investments.  If that earning comes from longer-term holdings, that is the amount eligible for the special tax rate.  This amount is considered to be a net capital gain.  To determine how much out of your pocket this means, you must first determine which tax bracket you are in.  If you are in the 10 to 15% bracket, your capital gain is usually 5%.  If the tax bracket is higher, such as 25% or 35%, the capital gain’s tax is usually 15%.  It’s important that all gains and losses are shown on the IRS worksheet.  Once this is done, your total net gain or loss is determined on Line 44 of Form 1040.  You will not be eligible for the special tax rate if you do not compute your earnings and losses on the worksheet.

Banking - Business Finances - Economics - Insurance - Investing
Major Purchases - Personal Finances - Stock Market - Taxes