Declaration of gains or losses on stock market transactions
Thanks to a little extra income, I started getting interested in the stock market in 2021. Are gains and losses from stock trading taxed and treated the same as my salary or interest income on a Bank account ?
— JM, email
Gains and losses on shares are treated and taxed as “gains and/or losses” on immobility Activities. This classification provides a combination of “good news” and “bad news”. Other property that falls into the category of taxable capital property includes (1) items you collect, including assets a, b, c (i.e. antiques, baseball cards, coins) (2) art or jewelry primarily held for investment purposes (3) personal residence (4) gold and/or silver, and (5) a potpourri of other possibilities where space limitations prevent us from providing a detailed listing.
Salary and interest are ordinary income items that receive no special treatment under the Tax Code. The tax treatment of capital gains (GC) and capital losses (CL) involves a series of steps. The first step is to classify the CG and/or CL as long-term or short-term based on the “holding period”. Generally, if you hold taxable capital property for more than a year before disposing of it, the CG and/or CL will be LONG TERM. Capital gains distributions posted to a brokerage account are taxed as long-term capital gains (LTCG). Hold the taxable asset for a year or less before its sale, exchange or any other taxable event and the GC and/or LC is SHORT TERM.
The “good news” mentioned above surfaces when a taxpayer’s activity results in an aggregate net long-term capital gain (NLTCG) where the preferential tax rate could be as low as 0% (that’s right – nada, zero, zip) with the highest rate usually being 20% based on your total taxable income. “Bad news” comes when the overall condition of your fixed assets results in a short-term capital gain (STCG) or a net capital loss (NCL). STCG is taxed as ordinary income with no preferential treatment. An NCL can only offset $3,000 of ordinary income in a tax year. Any NCL over $3,000 can be carried over. The excess cannot be carried forward. No more “bad news” is that losses resulting from the sale of goods for personal use, such as your home or your vehicle, are not deductible.
Two examples we believe will enhance your understanding of the capital gains/loss provisions.
Example 1 reports NSTCG = $5,000 while NLTCL is $12,000; the end result is an NCL of $7,000. Only $3,000 from NCL will offset other revenue with $4,000 deferred. Example 2 shows that an NSTCG of $5,000 is combined with an NLTCG of $12,000. The $5,000 will be taxed at the ordinary income rate, while the $12,000 is eligible for preferential tax rate mentioned above.
Reporting capital gains or losses begins with Form 8949, Sales and Other Disposals of Capital Assets (a newcomer to the stable of IRS forms) by separating short-term and long-term transactions. Net totals of capital gains and/or losses are transferred to Schedule D of Form 1040. If you need more help, go to www.irs.gov for Publication 550, Investment Income and Expenses, and/or Topic No. 409, Capital Gains and Losses.
Warning from the Surgeon General: The above calculations will take some time and could lead to swearing which should be confessed at the next Lenten penitential service.
Ken & Klee Income Tax Bulletin Board. Remember that there is generally no income tax withheld from the sale of securities or other fixed assets. So if you generate capital gains, consult your tax advisor to determine if you need to make estimated quarterly tax payments to the IRS…and possibly your state. Next week’s column will provide additional information on estimated tax payments to the IRS and the State of Indiana. FYI, the IRS has already paid out $45 million in tax refunds on tax returns filed for 2021…an average of over $3,350 per refund.
Rick Klee was tax director at the University of Notre Dame from 1998 to August 2019. A retired CPA, Klee is a graduate of Notre Dame. You can contact him at firstname.lastname@example.org.
Ken Milani is a professor of accounting at Notre Dame where he served as faculty coordinator for the Notre Dame Tax Assistance Program. Contact him at email@example.com. Email questions to either.