The market has been volatile lately, and the last thing you probably want to think about is tax preparation.
But, the more you know about what to expect and the more helpful tips you keep in mind, the easier tax season will be for you, now that you’re a trader.
With that in mind, let’s take a look at three tax tips that will make this season easier for you. The more you educate yourself on the process this year, the easier it will be in the future to manage things like an IRS CP2000 for Cryptocurrency when you receive one, instead of having no idea how to handle it.
Let’s take a look at those tips.
1. Understand What You Might Have to Pay
You will likely have to pay taxes on capital gains and dividends. There is a short-term capital gains tax, as well as a long-term option. Short-term refers to a stock you’ve held for less than a year.
Taxes on nonqualified dividends will end up being the same as your tax bracket. Qualified dividends can be taxed anywhere from 0-20%, so you might end up paying less.
The more you understand how capital gains and dividends work, the easier it will be to make investment choices as you move forward into next year.
2. Knowing How to Pay Less
It’s no big secret that everyone wants to pay as little as possible on their taxes. If you think that isn’t possible when you’re a stock trader, you’re wrong. It’s just a matter of knowing a few tips and tricks, and how to use them to your advantage.
One of the best things you can do is to hold onto an asset for at least a year. When you do, you’ll qualify for the long-term capital gains tax, which is usually lower than the short-term option. As a result, you’ll end up paying less on that particular stock.
It’s also a good idea to hold onto dividends as long as possible. Doing so will allow them to become qualified dividends, instead of nonqualified. As stated above, you might end up paying less on qualified, so it’s worth it to hold onto the shares as long as possible. If you’re tempted to sell before the year is up, consider the pros and cons, and how much more you might end up saving if you’re able to hold onto the stock a bit longer.
Additionally, you can offset your gains with investment capital losses. If your losses on the year are more than your gains, you can deduct the difference up to $3,000 on your tax return. That’s significant, especially if you incurred a large loss over the year.
3. Hold the Shares in a Tax-Friendly Account
One of the best things you can do to your dividends and capital gains is to put them in a Roth IRA or traditional IRA. These are tax-free and tax-deferred, respectively. You can also put them in a 401(k) and you’ll never pay taxes on investment growth or interest. The only “catch” is that the money has to stay in that account.
If you’re not familiar with these types of accounts or you’ve never opened one more, consider talking to an investment broker or your local bank to set one up. It’s easier than you might think, and a great way to give yourself financial security for the future.
Bonus - Work With a Tax Professional
If you’re just starting out in trading or investing, don’t be afraid to work with a professional when it comes to your taxes. Even if it’s just for one year, you’ll learn a lot, and the job of a tax preparer is to make sure you’re getting every deduction possible. So, don’t be afraid to work with a reputable company or individual.
Additionally, make sure you’re asking questions along the way. You can end up making the decision if you want to use a professional year after year. But, the more you know about what they’re doing and how you can keep as much of your money as possible will be a big help as you continue to make investments and buy new stocks.
This is a contributed post.