How Retail Traders Can Prepare for Tax Day
Income From Investments Is Taxed Differently Than Wages
Retail trading has surged during the pandemic. The brokerage industry saw more than 10 million new retail accounts added in 2020. As tax season approaches, there are a few important things for first-time traders to know.
Earnings from investments are taxed differently than wages or gig income. Some of these differences have advantages for taxpayers, and some make things more complicated. For example, investors are not required to pay Social Security or Medicare tax on income from trading. The combined total of these taxes can be up to 15.3%. However, there is no tax withholding on income from investments. With wages, often an employer sends a part of a person’s paycheck to the IRS, but this does not happen with investment earnings. This means that traders need to plan ahead and make sure they have money set aside for taxes on their investment earnings.
Capital Gains and Offsetting Other Earnings
Traders who keep investments for over a year before selling can qualify for lower tax rates on their profits, known as capital gains. Most retail traders turn over investments more quickly, so their gains and losses are designated as “short term,” and are taxed at a higher rate. This rate can range from 10% to 37%. There is also a 3.8% surcharge for higher levels of earnings. In some states there will also be additional state taxes.
For people who have seen losses from retail trading this year or last year, there are ways to use these losses to offset other earnings. Depending on the circumstances, up to $3,000 in unused losses can be used to offset other income, like wages.
For people who are new to retail trading, or who have made different types of investments this year because of unique market conditions, it is a good idea to consult a tax professional. A little planning and advice now could save time, money, and hassle down the road.
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