There are specific taxes that apply to individual traders and also to professional investors. Some of these taxes are levied at the federal level, while others may be charged by your state or local government. This blog post will provide you with a comprehensive understanding of the various taxes that investors in the US must consider, so that you may properly plan your tax-related decisions.
Federal Income Tax
As a US citizen or legal resident, you are subject to federal income tax on all of your worldwide income, including from investments. Income from the purchase and sale of securities is generally subject to short-term capital gains (STCG) tax and long-term capital gains (LTCG) tax. Let’s examine each of these terms and how they relate to your spread betting and CFD trading activity.
Every time you trade or invest in a security, you will eventually have to report the gain or loss from that investment to your tax man. The report will consist of several details, including the amount of money you invested in the security, your basis in that security and any other relevant information. If you held the security for more than a year, you will have to pay a special long-term capital gains tax on all your gain, as discussed below. Some investors may choose to pay only the federal income tax on their short-term capital gains, but it is still advisable to consult with a tax professional to make sure that you are properly calculating your taxes.
Short-Term Capital Gains
If you held a security for less than a year, you will have to pay short-term capital gains (STCG) tax at the rates applicable to your state of residence. This tax varies by state, but is normally somewhere between 0% and 15%, depending on your circumstances. In addition, you will have to pay a separate federal short-term capital gains tax of 20% on all your STCG, with certain exceptions. These are discussed below.
Long-Term Capital Gains
If you held a security for more than a year, you will have to pay long-term capital gains (LTCG) tax at the federal rate. This rate varies by state, but is normally somewhere between 3% and 20%, depending on your circumstances. In addition, you will have to pay state income tax on your LTCG, as discussed below.
The 10% Additional Tax On Stocks
If you are an individual who is required to file a federal income tax return, you may have to pay an additional 10% tax on your stock sales, if your annual stock sales exceed $200,000. If you decide to sell any stock or fund that you may acquire at a discounted price as part of a corporate or business jetting, you may have to include that amount in your taxable income. When you file your tax return, you will need to notify your tax man of all your stock sales activity, including the amount and type of each sale, the date and prices. This is to ensure that you are not inadvertently avoiding paying taxes on stock trade gains.
The 3.8% Medicare Tax On All Investment Transactions
If you engage in any type of investment activity, you will eventually have to file a Medicare tax return, whether you realize a gain or loss on that activity or not. The return requires you to report your trading activities, including the specific stocks, funds, or other securities that you purchased and sold. In the case of a stock trade, you will need to report the date of the trade, as well as the amount of the trade. Your Medicare tax will be 3.8% of all the money you invested in the transaction, including the amount of any dividends or interest.
There are exceptions to the Medicare tax for certain types of transactions. For example, if you are trading to avoid losses or to improve your position in a company, you will not have to pay the 3.8% Medicare tax on that transaction. In some cases, you may be able to get a refund from Medicare of up to 3.8% of your investment, if you meet certain criteria. You will need to contact a tax professional to make sure that you are calculating the proper tax on all your investments. For more information, please visit the IRS website at:
- irs.gov (IRS)
- healthcare.gov (Healthcare.gov)
- myhealthcare.gov (My HealthCare)
State Income Tax
Depending on your state of residence, you may be required to pay state income tax on all of your investment activity. If you reside in one of the following states, you must pay state income tax on your capital gains: Alabama, Alaska, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, and Wyoming. If you are required to pay state income tax, you will need to file a state income tax return (such as a Sales Tax Return) with the IRS every year. Your state income tax obligation will generally be based on your annual (or more frequent) income from dividends, interest, or capital gains from sales of securities or other investments, as well as any passive activities (such as leasing real estate or an aircraft). If you have a partnership and would like to deduct your share of the partnership’s income, you must file a state tax return for the partnership.
Death And Gift Taxes
Certain individuals, including those over age 70½, must pay an estate tax on their death, in addition to any other taxes owed. If you are in this situation and have not already filed a tax return for the 2012 tax year, you will need to do so as soon as possible, as there is no extension for filing. Filing a tax return on behalf of a deceased person is called an “unfiled return.” A deceased person’s estate can include all of his or her property (such as stocks, bonds, mutual funds, real estate, etc.), and the IRS will generally treat the estate as a single taxpayer for the purposes of the estate tax. In order to give the estate tax a more individualized touch, the IRS will sometimes examine the returns of individual taxpayers who submitted an “unfiled return” on behalf of their deceased partner. These examinations are called “partnership returns.”
If you are planning to give anything away during the year, you may need to complete a gift tax form. The form must be filed and may not be done manually. If you are not sure whether you need to file a gift tax form or not, you should consult with a tax professional. There are several different gift tax rates, depending on the value of the gift. The maximum rate is 35%, but you may give up to $13,000 per year to as many individuals as you choose, with no gift tax due. In addition to the gift tax, you will have to pay a 10% tax on the value of the gift. The value of the gift is the market value of the item at the time of the gift. For example, if you are donating stocks, the value is the price that you paid for those stocks. If you are donating a piece of real estate, the value is the fair market value of that real estate. Donating artwork may also require you to complete a form and pay a 10% tax on its value. The tax laws relating to gifts are a bit confusing, and it is essential to retain the services of an experienced tax attorney to ensure that you are filing the proper returns and receiving the proper credits for all your gifts.
The information in this blog post should serve as a foundation for your discussion with a professional tax attorney, who can then help you to properly form your investment planning strategies.