Published on 09/04/2020
The most recent pandemic has affected almost all the industries, and the financial markets were no different. The most recent COVID-19 market crash saw a lot of people in action. Many people went for value buying, and many just sold their holdings on staying away from the uncertainties. Well, as we all know, all these transactions are subject to income tax. It is essential to consider the impact of taxes since it profoundly affects the profitability of your investments.
Before understanding the implication of taxation on investment, it is essential to know the type of income generated from the investment, i.e. income by way of dividends/interests on assets or capital gains on account of buying and selling securities.
In this article, we will mainly focus on tax implications on buying and selling stocks and securities. Income tax is levied on every penny that is earned. If you are making profits by selling shares of a company, a part of that profit will be paid to the government. This is known as capital gains. In simple words, a capital gain is when the selling price of the security is higher than the purchase price.
Once we have classified the income as capital gains, it is furthermore essential to group the type of capital gains. Primarily, the capital gains are taxes based on the period of holding of the security, i.e. either short term capital gains or long term capital gains.
Short term Capital Gains: Short term is generally perceived to be speculation and hence, are charged at a higher rate. In the States, the period of holding less than a year is classified as short term. Therefore, the gains on such transactions shall be classified as short term capital gains.
Long term capital gains: In the States, the securities held for a period more than one year are classified as long term. The long term capital gains and qualified dividends are generally taxed at special tax rates at 0%, 15%, and 20% subject to the taxable income slab.
You must be wondering that the government charges taxes on the income earned. But what about the capital losses on securities? Does the government pay you back?
Well, no government would do that. Instead, the government allows taxpayers to offset the capital gains against the capital losses of previous years to reduce the tax burden from investment income. E.g. If there is a capital loss on dealing in securities, then the taxpayer can claim such capital loss in the income tax return and carry it forward to future years. This brought forward loss can be then used to offset the gains in the future, if any. In short, the tax liability in the future on capital gains is reduced.
Is there any other way to reduce taxes on buying and selling stocks?
Well, the income is only charged on the income or earning of the taxpayer. If you are generous enough to contribute the long term appreciated stocks for public charity, it may help you to save some taxes. Donation calls for an independent valuation of the security and therefore, increases the cost of the asset and may be able to eliminate capital gain taxes.
It is very easy to confuse in these laws, and it may temporarily shift the focus from fundamental business, i.e. investing. Taxes should be considered in decision making, but an investor should not base his decision entirely on taxes. Don’t worry about knowing the tax complications of investing in your tax returns. MyTaxFiler has a set preliminary questionnaire to understand the requirements, current status, and the way forward about you and your investments and will give you the tax deductions and credits you’re eligible for based on your answers.
If you have questions, you can connect with MyTaxFiler at firstname.lastname@example.org, and get your tax questions resolved!