Did you kill in GameStop? Now comes the tax bomb

Investors who appreciate the high returns of GameStop stock may be surprised: a big tax bill.

GameStop’s stock price has risen more than 1,700% since the start of the year through Wednesday’s close. It rallied 130% Wednesday to nearly $ 348 a share. The video game retailer’s stock was priced at $ 39 per share a week earlier.

Shares of AMC and Bed Bath & Beyond also surged this week, fueled by extreme speculation among retail traders.

But Uncle Sam will also benefit from the fortunes of investors.

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GameStop buyers who sell their holdings will have to pay a capital gains tax on any income. Say, for example, that an investor sells the stock for a profit of $ 1,000. This $ 1,000 is subject to tax. It would expire in the 2021 tax reporting season if sold that year in a taxable account.

The total amount will depend on many factors, including an investor’s income and the length of time the investor owned the stock.

The richest taxpayers will cede at least almost a quarter of their earnings and perhaps more than 40% to the federal government. States can take even more.

Of course, investors can choose to keep their investment, in which case they will not owe tax.

Those who sell for profit – and pay the taxpayer – can always be reassured that they have ultimately made money.

“If you’ve had a really good run, there’s always an easy way to avoid paying taxes – and that’s wasting all your money,” said Certified Financial Planner Jeffrey Levine, Director of Planning at Buckingham Wealth Partners in Long Island, New York. “Having most of something is always better than nothing.”

The federal government taxes long-term capital gains (those from an investment held for more than one year) at favorable rates compared to typical income taxes.

For example, the richest Americans pay a top tax rate of 23.8% on these stock returns (a 20% capital gains tax plus a 3.8% Medicare surtax on investment income) . However, they pay a 37% higher rate on wages.

Low and middle income earners may pay a smaller share – 15% or maybe nothing at all, depending on their annual taxable income.

But the bite would be bigger for those who sell stocks after a brief ownership.

They would pay short-term capital gains rates, which apply to investors who sell a stock after a year or less. They are the same as the personal tax rates.

Uncle Sam would take 40.8% of the GameStop earnings from the richest investors in this case, instead of 23.8%. (This includes a top tax rate of 37% and a Medicare surtax of 3.8%.)

Most states tax capital gains as ordinary income, which means long-term investors do not benefit from a favorable tax rate.

Investors may be able to limit their tax bill by using a strategy called “harvesting tax losses”.

Investors would deliberately incur losses in a taxable account by selling investments that have fallen in value. In doing so, investors can offset capital gains from the appreciated assets they have sold.

However, there are some caveats and potential pitfalls for the unwary.