watering bucket with money
watering bucket with money

First Time Investors, Here’s What You Need To Know About Taxes

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There continues to be an increase in the number of people investing in stocks, especially when it comes to Millennials and Gen Z. The ability to easily trade and invest with a rise of investment apps like RobinHood, Stash, Acorns, and Coinbase also attributed to the increase of investors in the last few years. This year, Millennials and Gen Z jumped into investing for the first time as a result of low stock prices at the start of the coronavirus, which has also led to massive growth.

Investing for your future and for your retirement is one of the most important things that you can do. But the impact of investing on your taxes can also be uncertain. Fortunately, these tips will give you a solid primer on what you need to know about taxes and your investments, and they will answer questions like, “What kind of investment records should I keep?”, “How are my capital gains taxed?”, and “What is the difference between a short term and long term capital gain?”

Keep Good Records

Modern day brokerages and investment apps have pretty good transaction records, but they’re not always perfect. It’s always good to have a backup transaction log of what you purchased – date, number of shares, cost basis, and to include commission and other fees. If there are mergers and acquisitions, or other similar company events, record the details for those as well.

Taxes Are Assessed On Realized Gains

For many new investors, it’s not clear how your investments are taxed. If you buy a stock and the value of it goes up, you do not have to pay taxes on those gains every year. You only pay when you “realize” the gain by selling the shares.

If you buy 10 shares of Company X for $10 and the stock jumps to $12, you don’t owe taxes on the $2 gain yet. It can continue to grow, without being taxed, until you sell it.

Investments go up in value, but they can also go down. When you have an investment that goes down in value, it won’t have any tax implications until you sell your investment. If you buy 10 shares of Company Y for $10 and the stock falls to $8, you have a paper loss of $2 per share, but no real loss. When you go to sell, you will realize that loss.

Realized losses can be used to offset realized gains. In the above scenario, with Company X going up $2 and Company Y going down $2, you have a realized gain of $20 and a realized loss of $20, respectively. If that were all in the same tax year, the gain is offset by the loss and you owe nothing in taxes.

Long Term vs. Short Term

When it comes to your gains, it’s good to know the difference between short term capital gains and long term capital gains.

Your gains are taxed at the short term capital gains rate when you sell them and have held them for one year or less. Your gains are taxed at the long term capital gains rates when you sell them and have held them for more than a year.

The short term capital gains tax rate is based on your income tax bracket rate. If you’re in the 22% income tax bracket, then your short term capital gains tax rate is 22%.

Long term capital rates remain lower than your ordinary income rates at 0%, 15%, and 20% and are not tied to your ordinary income brackets.

Capital Losses Can Offset Income

If you have more losses than gains in a year, you can take up to $3,000 of those losses and apply it against your income, thereby reducing it. Any amount of loss over that $3,000 can be carried forward to future tax years indefinitely.

It’s painful to take a loss, but if you must, it’s nice that you can use it to offset higher taxed income.

Net Investment Income Tax

If you are single or head of household and making over $200,000, or married filing jointly making over $250,000, or married filing separately making over $125,000 you may be subject to the net investment tax of 3.8%. This is an extra tax of 3.8% on net investment income above the threshold amount.

Don’t worry about knowing the tax implications of investing when you file your taxes. TurboTax Premier will ask you simple questions about you and your investments and give you the tax deductions and credits you’re eligible for based on your answers. 

TurboTax Premier can help you accurately figure out your gains and losses and is the only major online tax preparation software that supports importing over 1,500 stock and 2,250 cryptocurrency transactions at once directly from financial institutions, saving you time and ensuring accuracy. TurboTax Premier has partnered with over 300 financial institutions and investment platforms to allow you to auto-import your investment info seamlessly when doing your taxes.

If you have questions, you can connect live via one-way video to a TurboTax Live Premier tax expert with an average 12 years experience to get your tax questions answered. You can even connect virtually with a dedicated tax expert who will prepare and file your tax return in entirety with TurboTax Live Full Service without you ever leaving home. TurboTax Live Premier tax experts are available in English and Spanish year-round, and can also review, sign and file your tax return.  

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