Taxes & the Market
It seems a lot of people new to investing are really excited about the gains, sad about the losses, but don’t really configure taxes in here. So I just wanted to briefly put out some information about taxes and the market so people can do the math.
Short term gains
If you buy some shares, hold it for less than a year, and sell it for more, you made a short term capital gain. Then you’ll get a form from Robinhood that says that you made that much money, and you will be taxed at a regular rate (whatever income bracket you are in).
Long term gains
If you buy some shares and hold it for more than a year and sell it for more, you’ve made a long term capital gain. Here, you’ll be taxed at either 0, 15, or 20.
You can find the bracket you belong in here: https://www.fool.com/retirement/2016/12/11/long-term-capital-gains-tax-rates-in-2017.aspx
For example. Let’s talk about $AUPH. Say I made a profit of $10k, and if I sell today, then I’m taxed at a (28% possibly 33% if the stars align this year). That means Uncle Sam gets about $3k. If I hold it for a few more months, and let’s just say my profit remains the same (it won’t), then I get taxed at 15%. See the difference?
Feel free to read more about that here:
If you buy a share, and it drops, and you sell it at a loss, you can deduct from your capital gains, so you’re taxed less.
This part is VERY important. If you sell a stock at a loss, and then within a month (31 days) you buy it back, we have to do some more calculations. So say I bought $PTN (sorry guys, it sucks) at 100 shares at $0.50, and it drops down to $0.30. I lost $0.20 per share, or $20 total. Now, I can claim that loss on my taxes to reduce my liability. HOWEVER, if I buy it again within a month, then the capital loss from my original sale is now deferred to when you sell the new shares.
To follow the previous example, Initially I bought 100 shares of PTN at $0.50. I spent $50 on it. Then I sold it for a loss at $0.30. I technically lost $20, right? What if I bought it again, within 31 days, because there was good news? This time, I bought it at $0.40, at a total cost of $40.
Since this is a wash sale, you cannot report the $20 you lost, however, what you can do is defer the loss to your new cost. Following the example above, though you spent $40 on the repurchase, deferring the previous loss makes the new cost $60. This way, when you do sell your PTN later on down the road, your capital gains is lessened.
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