The All-in-One Guide to Capital Gains and Taxes
Tax season is stressful, there’s no way around it. Especially for all the individuals who find themselves investing for the first time, unsure about the ways investing can sometimes make taxes a tad more complicated. ⚡
However, by making taxes an integral part of your tax preparedness plan, you’ll be ready to tackle the different aspects of capital gains that can make it crazy.
Let’s get started!
First Off: What is Capital Gains Taxes?
Anytime you sell any sort of investment for a profit, that’s a capital gain. These investments include stocks, mutual funds, options, etc.
Making a profit off of any goods, service or investment means you’ll have to include it as a part of your taxable income for the tax year on your IRS tax return.
Now, there are two different types of capital gains. There are Long-Term Capital Gains and Short-Term Capital Gains.
Long-term capital gains is a term used to describe the profits you made off of investments you held for more than one year. Holding an investment for an extended period of time opens the door to lower tax rates.
Short-term capital gains is a term used to describe the profits you made off of investments you held for less than one year. This is taxed like ordinary income.
How Do I Report My Capital Gains to the IRS? 🤑
Thankfully, federal tax laws require investment companies to disclose the exact profit you made from investments in the prior tax year. If you have a Firstrade account, you should have received your 1099 form via email sometime between last January or late February. To download the document again, login to your Firstrade account and go to Account > E-Documents > Tax .
If you’re using TurboTax software to file your taxes (click here to claim your exclusive Firstrade discount on taxable investment accounts), the program will ask if you’ve received a 1099 and then provide instructions for importing the document.
You can also work with an accountant to help you determine the best methods for avoiding capital gains taxes and penalties.
Second: What are the Best Ways to Minimize Capital Gains Taxes?
Even with the most educated accountant or broker on your side, you’ll still end up having to pay a tax on capital gains. However, there are ways to lessen the blow. 💣
You probably were unaware, but you can actually utilize 401K accounts and IRAs to minimize capital gains taxes.
This is because:
Any investments within a Roth IRA account are tax exempt.
When you make a withdrawal from a Roth IRA account, it isn’t taxed.
Any contributions you make to a 401k or IRA reduce the amount of your taxable income for the year. (Which means you’ll pay less tax TODAY for any capital gain!)
Utilize Tax-Loss Harvesting for Off-Setting Capital Gains ⚖
You won’t always make a return on your investments. And not always because you did anything wrong. It’s the way the game goes. Anytime you have to sell an investment for less than you originally invested into it, you end up with what is commonly referred to as a “capital loss”.
Tax-loss harvesting can help you reduce capital gain taxes. We’ll give you a good example below.
You have an investment account, and most of your investments have made good returns. But one of your stocks has unfortunately fallen by 10% after six months. This means that if you sell at this time, you will only be able to sell at a loss. But the advantage is that you can now use this loss to offset your other capital gains to reduce the overall capital gains tax burden.
If your capital loss exceeds the capital gains, you can also use this capital loss to offset the taxable income of any tax year, up to a maximum of $3,000 per year, which is a way to reduce your income tax burden.
And no, it’s not usually this straightforward, unfortunately. That’s why we recommend hiring a professional to help you sort through your options.
Top 25 Most Traded Stocks by Investors at Firstrade in April
Here’s the full list of top favored stocks among Firstrade investors:
Tesla Inc. (TSLA)
Taiwan Semiconductor Mfg. Co. Ltd. (TSM)
Apple Inc. (AAPL)
Palantir Technologies Inc. (PLTR)
Coinbase Global Inc. (COIN)
Advanced Micro Devices (AMD)
Marathon Patent Group Inc. (MARA)
NIO Inc. (NIO)
United States Steel Corporation (X)
Quantumscape Corp. (QS)
Square Inc. (SQ)
NVIDIA Corp. (NVDA)
Netflix Inc. (NFLX)
Riot Blockchain Inc. (RIOT)
Microsoft Corporation (MSFT)
Skillz Inc. (SKLZ)
AMC Entertainment Holdings Inc. (AMC)
Grayscale Bitcoin Trust (GBTC)
Carnival Corp. (CCL)
Opendoor Technologies Inc. (OPEN)
GameStop Corp. (GME)
American Airlines Group Inc. (AAL)
Teladoc Health Inc. (TDOC)
Alibaba Group Holding Ltd. (BABA)
Boeing Co. (BA)
Fine Tune your Options Trading with Weekly Expirations
The introduction of widely available weekly expiration option contracts provides investors with flexibility to the timing of option contracts. Weekly options are designed to give traders more flexible exposure to market events such as releases of economic data and earnings announcements. The advent of weekly options has also provided investors with significantly more strike prices to choose from. This has allowed investors to trade strategies with very precise risk and reward metrics and timing based on their risk tolerance and market outlook.
The primary difference between weekly options and monthly options are that the weekly options have expirations every Friday while the monthly options only expire on the third Friday of the month. Weekly options have the same risks associated with the exercise or assignment of shares as monthly options, but due to the higher frequency of expiration dates, will have these risks occur more frequently.
Weekly options are the same as monthly options in most aspects, but due to their shorter expiration dates weekly options tend to have:
Smaller premiums: shorter dated options that expire on the first or second Friday of the month will have less premium than the monthly options expiring on the third Friday. This provides a lower cost for option buyers and a lower credit received for option sellers.
Accelerated time decay: while an option's value does erode with time, the rate of the decay in the options price happens at a faster rate closer to expiration.
Higher gamma exposure: gamma refers to the rate of change in respect to an options delta. With less time to expiry, the delta fluctuations of an option become more volatile to changes in the price of the underlying. This means that a small move in the underlying will have a larger impact on the pricing of the option contract.
In summary, weekly options and monthly options are very similar. They have similar characteristics, but weekly options are prone to more volatility and accelerated time decay. While this provides opportunities to trade more frequently, shorter dated options typically require a more active trade management.
At Firstrade, we provide abundant options educational resources and hold live webinar session every week. If you get cold feet on options trading and not sure where to start, then watch our options tutorial videos, join our options events and utilize our friendly options trading platform to give your online options trading journey a good head-start. Our offering of $0 commission and $0 contract fee for any options orders will also help you waive the worries about fees. Trade options with Firstrade starting today!
Get instantly approved for an additional account on the Firstrade App
Firstrade offers a variety of accounts for every type of investor. If you have brokerage account with us and would like to add another type of account (like a retirement account) into your investment portfolio, you can now do so easily right on the Firstrade app.
Just follow these simple steps to get instantly approved for an additional Firstrade account:
On the Firstrade app, go to Account > Open a new account
Select an Account Type (Individual Brokerage Account, Traditional IRA, Roth IRA or Rollover IRA)
Your information will be pre-filled for your convenience.
Submit your application
Your new account should be approved within minutes!
Download or update your Firstrade App here.
As always, we’re working to make your experience with Firstrade better. If you have any feedback, please let us know, we’d love to hear from you!
What The SECURE Act Means for Your IRA?
Tax law changes are nothing new, but in 2019, when the SECURE Act became law, it significantly changed some standard practices for retirement accounts, parents and business owners. With adjustments that impact both contributions and distributions to IRAs, the Act will likely be a game-changer for many retirement savers. Let’s look at a quick breakdown:
1. Change in age for IRA required minimum distributions (RMDs)
If you have a Traditional IRA, you must take taxable distributions at some point in your retirement. That age was 70.5, but with the passing of the SECURE Act, it’s now 72. This is generally good news because it means that you can hold, trade and invest savings longer, accumulate more tax-deferred growth, and possibly hit an even lower tax bracket when you start taking distributions.
2. Removal of the age limit for IRA contributions
In the past, Traditional IRA owners could no longer contribute to their account by age 70.5. Now, there is no age limit for making contributions as long as the IRA holder is still employed. This gives investors much more time to save for retirement and enjoy a tax break for doing so.
3. Nonspouse IRA beneficiaries must take funds within ten years
Before the act was passed, nonspouse IRA beneficiaries could stretch out their distributions, potentially leaving unused funds to their children. Now they will need to withdraw inherited IRA funds within ten years of the original owner’s death. One way to offset the cost of taxes on these distributions may be to open an IRA of your own.
4. Certain parental withdrawals are permissible
New parents might be able to take a penalty-free withdrawal of up to $5,000 (per parent) from a retirement account within 12 months after giving birth or adopting a child to cover child-related expenses. Parents might also qualify to take as much as $10,000 from a 529 for student loan repayment. While these withdrawals would not be subject to penalties, they may still be taxable.
5. Part-time employees can participate in 401(k)s
Part-time employees who have consecutively worked from 500 to 999 hours for a single employer over more than three years may now be permitted to participate in the employer's 401(k) plan. Employers may require additional hours worked before qualifying for matching employer contributions.
Business owners have also seen a few changes thanks to the act, including:
Tax credits for small businesses (100 or fewer employees) starting a 401(k): Get up to $5,000 in tax credits when your 401(k) includes non-highly compensated employees and automatic enrollment.
It’s a lot to absorb, so here’s a list of key takeaways to help break it down:
Do you have an IRA? Now you can contribute as long as you remain working. Also, you don’t need to take required minimum distributions until you’re 72.
Have you inherited an IRA? If you are a nonspouse beneficiary, you’ll need to take the funds out of the IRA within ten years after the death of the original owner.
Are you a parent? You might be able to take an early, penalty-free withdrawal of up to $5,000 to pay for expenses within a year of the birth or adoption. Parents of older children haven’t been left out, as they may take a penalty-free withdrawal of up to $10,000 to repay student loans.
Do you work part-time? You may now be able to take part in your employer’s 401(k) if you’ve worked at least 500-999 hours over three consecutive years.
Are you a small business owner? You could qualify for tax credits when you set up automatic enrollment in a 401(k) covering non-highly paid workers.