Not Paying Too Much in Taxes on Stock Trades
For someone who actively trades stocks, record keeping is essential. It could mean the difference between making money or losing a whole lot of it when it comes time to reporting your taxes.
Even though all stock brokerage firms send you a 1099 form at the end of the year detailing your selling history for that year, they do not include a form stating your purchases. The rules of purchasing relating to taxes are very complex. The following will help set some guidelines:
- The IRS is particularly interested in the period of time that you have been holding on to your stocks. If you have stocks for less then one year and you sell them, the gains are taxed at almost 41%. If you have had stocks for over one year and sell, you are taxed 20% on the gains if you are in the 28% tax bracket and at 10% if you are in the 15% tax bracket. Keep track of your purchases! When you choose to sell stocks, try to sell the ones that are at least one year old.
- The wash sale rule says that if you dump stocks when they are at a loss and then pick them up again within thirty days when they start to go up again, the loss you incurred is not tax deductible. For example, you buy stocks at $15; they go down to $5 and you sell all of your 200 stocks. You just took a hit of $2000. The stocks go back up to $11 and you buy back your 200 stocks for $2200. In the eyes of the IRS, the basis for that stock now is $4200, encompassing your recent purchase plus the loss. Even though you cannot write off that loss, the gain that you get from the sale of the stocks will be less taxing.
- The best kind of trading still pertains to the traditional or the Roth IRA. This money stays in your tax-free or tax-deferred accounts and you can move the money without worrying about the purchase receipts or keeping accurate records. All the gain you make appreciates over the years in the accounts without IRS seeing a dime of it.