But there is someone else watching this fight between David and Goliath: the Internal Revenue Service. Trading creates taxable transactions. If investors are not careful, they may be triggering significant tax implications for themselves.
“Investors should consider the tax impact of their trades because all profits made from trading stocks are taxable. Oftentimes investors think they are entitled to the full amount of profits, especially new traders,” says Colin Horsford, CPA and Managing Partner of Horsford Accounting & Advisory in New York City.
While potential tax ramifications might not change investors’ behavior, being aware of the consequences can help them prepare for when the tax bill comes due.
Short Term Gain versus Long Term Gain
Timing matters when it comes to investments and tax. Gains that are generated on investments held longer than a year and a day are considered long term capital gains. These gains are taxed at preferential rates ranging from 0%, 15% or 20% depending on the investors tax bracket. The Net Investment Income Tax of 3.8% might apply for single taxpayers with adjusted gross incomes above $200,000 and married taxpayers who make more than $250,000.