Stocks & Bonds:

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 their taxes.

Even though all stock brokerage firms send your clients a 1099 form at the end of the year detailing their selling history for that year, they do not include a form stating your client’s 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 your client has been holding on to their stocks. If your client has stocks for less then one year and they sell them, the gains are taxed at almost 41%. If your client has had stocks for over one year and sell, they are taxed 20% on the gains if they are in the 28% tax bracket and at 10% if they are in the 15% tax bracket. Keep track of purchases! When your client chooses to sell stocks, advise them to sell the ones that are at least one year old.
  • The wash sale rule says that if your client dumps 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 they incurred is not tax deductible. For example, your client buys stocks at $15; they go down to $5 and they sell all of their 200 stocks. Your client just took a hit of $2000. The stocks go back up to $11 and they buy back their 200 stocks for $2200. In the eyes of the IRS, the basis for that stock now is $4200, encompassing their recent purchase plus the loss. Even though your client cannot write off that loss, the gain that they 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 client’s tax-deferred accounts and they can move the money without worrying about the purchase receipts or keeping accurate records. All the gain they make appreciates over the years in the accounts without IRS seeing a dime of it.