Tax Week: Investments and Your Tax Return
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Here's your money briefing for Wednesday, March 10th. I'm J.R. Whalen for The Wall Street Journal. All this week, we're looking at some of the particular tax issues facing many Americans this year as they get ready to prepare their returns. Today, we're talking about investments, what to expect when Uncle Sam comes for his share of your proceeds.
Well, day trading got to be a big thing last year, especially on places like Webull or Robinhood. And yes, a lot of those people have short term gains and they're going to find out they're going to get big, long summaries of transactions from their brokers and providers.
Coming up, our tax reporter Laura Saunders will explain how investments are taxed differently from salary and how to avoid a surprise tax bill from all that day trading. That's after the break.
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Along with their work salary, a lot of people have investment income to report on their tax returns. As day trading becomes more popular and people buy and sell assets, sometimes within days, the amount of information to keep track of can really pile up. To help clear up some of the confusion about what to do with it, we've got our tax reporter Laura Saunders with us. Laura, two days in a row. Thanks for taking the time to speak with me again.
Thanks for having me.
So let's cut to the chase. How is the income from investments taxed differently than the way income from, let's say, your job is taxed?
Oh, it's very different. In many cases, it's very different. You don't owe Social Security tax on it, for one thing. And another thing is that if you hold the investment for longer than a year, then you can get much lower tax rates on what's called long-term capital gains when you sell it. And you don't owe tax until you do have a sale. So you could hold something for 40 years, and there's no tax until you sell it, unless there's a dividend, of course.
Now, the difference in the taxation between an investment someone holds for a couple of months as compared to a couple of years, can that be pretty large?
It can be enormous because so-called short-term capital gains, that's income on investments held a year or less, those are the same rates as ordinary income. So the rates are like 10%. to 37%, plus sometimes an extra surtax on top of that. Now, if you have long-term capital gains, the rates go from 0% to 15%. You can even pay nothing on those gains if you're a lower income taxpayer. So that's a huge difference, ordinary rates versus low rates.
Now, we've seen a lot of stories about people who were buying and selling stocks at a pretty fast clip, and some have made a decent amount of money along the way, but they run the risk of really running up their tax bill.
Well, day training got to be a big thing last year, especially on places like Webull or Robinhood. And yes, a lot of those people have short-term gains, and they're going to find out.
What should day traders expect to receive from brokers and why does it matter for taxes?
They're going to get big, long summaries of transactions from their brokers and providers, and those have to be put into the tax return.
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