So, did you make a lot of money on your last swing trade? Congratulation! But now the difficult part, determining the taxes on stock transactions. You may be wondering, “How do stock market transaction taxes work?” It’s not an uncommon question to ask, given the nuanced way taxation works on investment profits. Today we are going to explore and discuss the different stock market trading taxes, how they work and how you pay them.

Taxes on stock market transactions: context

Taxes paid on investment profits are called capital gains. There are two different types of capital gains taxes, determined by how long you have held the investment. The two types of capital gains taxes are long-term and short-term capital gains. Cost basis is the baseline used to determine gains or losses. Calculating the cost basis includes using not only the cost of the title itself, but also any applicable commissions.

You also need to know whether or not the securities you own pay dividends. Qualified dividends are taxed according to your federal tax bracket, but on a scale of 0/15/20%. And ordinary dividends are based on your federal tax bracket. For more information about taxes on stock market transactions paying qualified dividends, consider speaking with a tax professional.

Long-term or short-term capital gains

Long-term capital gains apply to earnings from securities you’ve held for more than a year. Starting in 2021, a single person earning up to $41,675 a year would pay 0% long-term capital gains. Someone earning between $41,676 and $459,750 would pay 15%. Anyone earning more than $459,751 would pay 20% on their long-term capital gains.

Short-term capital gains apply to earnings on securities you’ve held for less than a year. The assessment of short-term capital gains is based on your federal tax bracket. For this reason, short-term capital gains can have a much higher penalty tax than long-term capital gains. And, this increase is more likely to be noticed the higher your regular income. However, understanding the two is most important for paying taxes on stock trades. For employees earning between $41,775 and $170,050, they will be taxed at 22 or 24%. Compare that to the 15% they would pay if they held for more than a year. Any [single] a salary above $170,051 will fall into one of the 32, 35 or 37% tax brackets.

For those who do not file their taxes as a single person, the taxes are quite different. Taxes for low-income married people filing separately are the same as those filing as single. For those filing as head of household or married filing jointly, please check the associated tax brackets. Anyone earning more than $41,775 as a single or married filing separately should do the same. In addition, for all such high-income earners, an additional 3.8% tax will be applied to all earnings. Although complicated, understanding your tax bracket and filing status will ensure you pay taxes on stock trades correctly.

Other circumstances

If you lose more money than you made, you can make up your regular income. This process, known as tax-loss harvesting, allows you to deduct up to $3,000 from your regular income. In addition, you can carry these losses forward to subsequent years. Money held in some retirement accounts is not taxed until the funds are withdrawn. However, funds held in Roth IRA or 529 accounts are not taxed at all. As it applies to a Roth IRA, an increase in your income may restrict your ability to contribute at all. If your money is in a 401k, investment growth, interest, dividends, and investment gains are not taxed. In addition, donating stock can also eliminate any potential capital gains tax. Shares held for more than one year and donated to a qualifying charity are not subject to capital gains tax.

Taxes on stock market transactions Conclusions

This article is intended to build on my previous article, Tax Season Tips. Understanding the confusion around taxes in general, tackling taxes on stock transactions seemed like a logical next step. I hope that with the information provided above you have a better understanding of how the process works. In short, your overall holding period, federal tax bracket, and filing status all impact your capital gains. There are also different ways to use potential losses or to “hide” your gains. These strategies range from tax loss harvesting to the use of tax-advantaged investment accounts and even philanthropy. Together, all of this information should help you better prepare for tax season.