In the past several years, with the pandemic in full swing and stimulus payments boosting the American economy, more and more everyday individuals started to explore the ins and outs of the stock market. Once reserved for private investment firms and professional traders, now anyone can easily purchase and sell stocks through popular online platforms such as E*TRADE or Robinhood, which have boomed when it comes to new users over the past several years.
However, just like all investments, when it comes to the stock market, your annual taxes need to be taken into account. So, review the following primer on how calculating and addressing taxes works on your annual 2021 tax return, so you’ll have a leg up before the April 15, 2022 deadline.
The Basics
First of all, in the United States, you will owe taxes on your stocks only if you sell them. For example, if you purchased a stock in the past that has grown exponentially in value, but you haven’t sold and profited off the investment just yet, there is no need to pay taxes on any perceived profits that you will make in the future.
If, however, you did sell stocks in 2021, then your annual taxes will come into play, in the form of short-term or long-term capital gain taxes. Capital gains are the profits you make when you sell any investment, which includes stocks, but also includes investments such as bonds, mutual funds, precious metals, cryptocurrencies, collectables (like coins or antiques), and even real estate.
So, when it comes to how much you’ll owe on your annual taxes, the IRS divides capital gains into two categories: long-term capital gains and short-term capital gains. It’s important to understand the difference between both situations, as it can have a big impact on your bottom line this year, and moving forward.
Long-term capital gains tax
Long-term capital gains taxes are for profits you have earned on stocks that you have sold, but which you previously owned for more than a year. For example, if you purchase a stock on January 1, 2020, and sold it a year and a day later, (on January 2, 2021), your profits would be subject to the 2021 long-term capital gains tax rates.
The long-term capital gains tax rates are determined by income, and include the following:
- 0% – A 0% tax rate applies if you are single (or married and filing separately) with an income of $40,400 and under, married and filing jointly with an income of $80,800 and under, and head of household with an income of $54,100 and under
- 15% – A 15% tax rate applies if you are single with an income of $40,400 – $445,850, married and filing jointly with an income of $80,800 – $501,600, head of household with an income of $54,100 – $473,750, and married filing separately with an income of $40,400 – $250,800.
- 20% – A 20% tax rate applies if you are single with an income over $445,850 married and filing jointly with an income over $501,600, head of household with an income over $473,750, and married filing separately with an income over $250,800
Short-term capital gains tax
The short-term capital gains tax rates are a little higher, and are in effect for any stocks you have owned for a year or less that you sold for a profit in 2021. As such, assuming your profits won’t be adversely affected by the changing stock market, it’s generally smart to hold on to stocks for a year or more whenever possible.
While long-term capital gains just have three tiers of tax rates – 0%, 15%, and 20% – short-term capital gains are divided into a total of seven different tax brackets, which have tax rates of 10%, 12%, 22%, 24%, 32%, 25%, and 37%. For example, an individual with an income of $9,950 – $40,525 would pay 12% of their profits in taxes. An individual with an income of $40,925 – $86,375 would pay 22% of their profits in taxes, etc.
Keep in mind that the above information on long-term capital gains taxes and short-term capital gains taxes are just the tip of the iceberg. Other factors also affect your annual tax return if you have losses, have a high income, have an IRA, and many other scenarios that investors commonly find themselves in.
Our Tax Experts Can Help
So, if you are new to the stock market, your best bet is to reach out to the professional tax experts at Waters Hardy & Co, P.C. We can help you navigate any new tax situation, which includes the stock market and miles beyond. Contact us today.