What you will discover:
What triggered the GameStop surge?
Will I have to pay taxes if I sell stock for more than I bought for it?
What is the difference between short and long-term capital gains?
What are your alternatives for paying your taxes?
Before you spend your stock windfall, be sure you understand the tax ramifications.
You may have heard how a critical mass of investors boosted GameStop’s stock value to unthinkable heights, much to the anger of richer investors who were counting on the company’s demise. GameStop’s stock value skyrocketed from less than $20 per share in December to almost $500 in January before settling back down to around $100, indicating a surge in demand that had nothing to do with traditional measurements.
This dramatic increase in value resulted in a windfall for many investors who opted to sell at the top. Many of the regular investors that cashed out are day traders and casual stock market players. These investors may be unaware of the tax consequences of short-term Wall Street profits. If you are one of those investors, it is usually preferable not to spend it all at once.
Unwitting GameStop investors, as well as those who have done the same with AMC and other companies, may face a significant tax payment this year or next. The tax repercussions vary depending on how long you owned the stock before selling, whether your state taxes capital gains, your overall financial status, and other variables. We will discuss why GameStop’s stock price has risen so dramatically, the tax ramifications of earning a rapid profit on stocks, and more to help you prepare for tax season without being caught off guard.
Table of Contents
What triggered the GameStop surge?
The stock price of every publicly traded corporation is ultimately determined by investor confidence and demand. If there is a significant demand for shares, the price per share rises. However, although demand for a company’s stock normally follows the ups and downs of its profits and future prospects, stocks may be manipulated in various ways to increase demand.
Shares in GameStop had been declining for some time before the founder of the WallStreetBets Reddit forum began purchasing shares and urging others to do the same. Meanwhile, many bigger and richer investors had acquired derivatives to “short” the stock, which rewarded them money if the price continued to fall as projected.
GameStop’s stock started to increase as Reddit users purchased shares via Robinhood and other popular day-trading platforms, which of course snowballed as more and more investors joined in. Because the increase in GameStop’s stock price was not based on the company’s fundamental financial health, and many investors perceived it as a short-term gamble anyhow, it is not anticipated to sustain.
Will I have to pay taxes if I sell stock for more than I bought for it?
Yes. If you make a profit on the sale of any stock—not only GameStop stock—you must pay capital gains tax. This is a tax on the profit you got from selling the shares. The profit is the difference between what you bought for the stock initially and what you sold it for. The capital gains tax rate you will pay, as well as when you must pay it, is determined by a number of variables. Your tax bill on stock sales might be as high as 40.8%, which is why it is critical to understand your tax requirements before spending it all. Short-term capital gains are usually taxed more heavily than long-term capital gains. Let us now compare and contrast the two kinds.
What is the difference between short and long-term capital gains?
Tax law prevents traders from selling newly obtained equities, sometimes known as “day trading.” The idea is to stimulate long-term investment in the larger economy and, in general, a less volatile stock market. This explains why the rates for short-term and long-term capital gains taxes vary so much. Here’s a quick comparison between the two:
Capital gains made in the short term. Profits from the selling of equities held for less than a year are included. They are taxed as regular income according on your tax rate, plus a 3.8% “net investment income tax” if you earn more than $200,000 per year (or $250,000 if married couples file jointly).
Capital appreciation throughout time. Profits from the selling of equities held for more than a year are included. They are taxed at variable rates that peak at 20% (compared to 37% at the high end for short-term capital gains), including a 3.8% surcharge for high-earners.
If you also have “capital losses,” you may be able to offset part of your capital gains taxes, but you cannot sell stock at a loss and then rapidly buy it for this reason. In addition, the Biden administration has explored tax code reforms that would abolish the reduced long-term capital gains tax rate for persons earning more over $1 million.
It is critical to remember that stock profits (and capital gains in general) are considered taxable income when establishing your tax rate. You do not have to pay capital gains tax if you are in the 10-12% tax band (individuals earning $40,000 or less in tax year 2020).
What are your alternatives for paying your taxes?
If you sold GameStop or any other company’s stock in 2021, you will not have to pay taxes on the profit until 2022. However, you must pay it, so you might consider putting money away now or during the year to make quarterly payments to the IRS before the tax deadline in 2022. If you have capital gains from 2020, you must expect to pay taxes in 2021 (or seek an extension or payment plan).
There are several strategies that may help you decrease or even postpone your capital gains taxes, such as giving stocks directly (if you meant to donate them anyway) rather than cashing them out and then donating the income. Another alternative is to reinvest your profits in an Opportunity Zone (a designated low-income neighborhood in need of investment), which would enable you to delay your debt for five years, but this is a complicated process. It is advisable to consult with a Certified Public Accountant (CPA) or a tax lawyer to verify that you are following all applicable requirements.
If you just do not have enough money to pay your taxes by the deadline, the IRS has a few choices. These include 120-day, no-fee payment options and longer-term monthly payment or installment plans that do include user costs. If you owe more than $50,000, you must provide a financial statement with your payment plan request. If you are in financial difficulty, you may be eligible for a temporary suspension of collection.
Before you spend your stock windfall, be sure you understand the tax ramifications.
According to Ben Franklin, the only certainties in life are death and taxes. If you made money by selling GameStop or other stocks, your tax burden will almost certainly need to be addressed. Make sure you know how much tax you will have to pay and save it away ahead of time.
