As commission-free brokerages and stock trading apps—like the popular Robinhood platform—continue to grow, millions of new stock traders may not be prepared for next year’s taxes.
When you’re new to trading stocks, you may not consider how your account may impact your taxes. For example, Robinhood only offers a taxable brokerage account—which is different from your tax-deferred 401(k). Here’s why: Every time you sell a stock, it may impact your taxes right away.
If you have already been buying and selling stocks through a trading app—or multiple apps—while stuck at home this year, here are some important tax tips to know.
Taxes on investment income
You may earn investment income when you sell a stock for a profit—or when you receive a dividend—and it is taxed differently from your salary at work. The difference is you may owe taxes at capital gains rates, based on how long you own the stock.
When you own a stock for a year or more and you sell it for a profit, you will owe long-term capital gains taxes, which typically aren’t more than 15%. This may be cheaper than your regular income taxes, depending on your tax bracket.
But if you own a stock for less than one year and sell it for a profit—which may be common for stock traders—you may owe short-term capital gains taxes. These rates are the same as your regular income taxes—aka “ordinary income” rates.
You may owe quarterly estimated taxes
Because our taxes are a pay-as-you-earn system, you may also owe quarterly estimated taxes throughout the year as you earn a profit selling stocks. You may use this worksheet to calculate what you owe—or you may seek guidance from a tax professional.
You may offset taxes gains with losses
As the end of the year approaches, it may be possible to offset some of your capital gains with other stocks that have lost money—known as capital losses. These losses have the same timelines, or “holding periods,” as short-term and long-term capital gains—but you must “realize” these gains or losses by selling those stocks before the end of the year.
You may learn more about the net capital gain or loss tax rules here—but you should work with a tax professional if you’re feeling unsure.
You may deduct some capital losses
If your capital losses exceed your capital gains, you may deduct up to $3,000 (or $1,500 if married filing separately) of your capital losses from your regular income. You can see more details about how to deduct capital losses on Schedule D.