Paul Weaver / SOPA Images / LightRocket via Getty Images
Investors gazing at hefty returns from GameStop shares may be in for a surprise: a major tax bill.
GameStop’s stock price is up more than 1,700% since the start of the year through Wednesday’s close. It was up 130% on Wednesday to nearly $ 348 a share. The video game retailer’s stock cost $ 39 per share just a week earlier.
Shares in AMC and Bed Bath & Beyond also rose this week, fueled by extreme speculation among retailers.
But Uncle Sam will also benefit from investors’ fortunes.
More from Personal Finance:
What Experts Say You Should Know About Investing in GameStop
Why a ‘tax on the rich’ policy may make sense right now
Trump lowered taxes on the rich. Biden wants to educate them
GameStop buyers who sell their property are liable to capital gains tax on all income. For example, say an investor sells the stock for a profit of $ 1,000. That $ 1,000 is subject to tax. It would be due in the 2021 tax return season if it were sold in a taxable account this year.
The total amount depends on many things, including an investor’s income and the length of time that the investor owned the stock.
The richest taxpayers will hand over at least nearly a quarter of their income and possibly more than 40% to the federal government. States can demand even more.
Investors can, of course, choose to hold their investment, in which case they will not owe any tax.
Those who sell at a profit – and pay the taxpayer – can still reassure themselves that they ended up making money.
“If you’ve had a really great run, there’s always an easy way to avoid tax – and then you’ll lose all your money,” said Jeffrey Levine, head of planning at Buckingham Wealth Partners in Long Island, New York. “Having the most of anything is always better than having all of nothing.”
Long-term capital gains
The federal government taxes long-term capital gains (that of an investment held for more than a 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 capital gains tax of 20% plus a Medicare surcharge of 3.8% on investment income). However, they pay a top rate of 37% on the wages.
Low- and middle-earners may pay a smaller portion – 15% or possibly nothing at all, depending on their annual taxable income.
Short-term capital gains
But the bite would be greater for those selling stock after just a short ownership.
They would pay short-term capital gain rates, which apply to investors who sell a stock after a year or less. They are the same as a person’s personal income tax rates.
Uncle Sam, in this case, would take 40.8% of the GameStop earnings from the richest investors, instead of 23.8%. (This includes a top income tax rate of 37% and a Medicare surcharge of 3.8%.)
Most states tax capital gains as ordinary income – meaning that long-term investors don’t get a favorable tax rate.
Harvesting with tax loss
Investors may be able to limit their tax bill through a strategy called “harvesting tax losses.”
Investors would intentionally incur losses in a taxable account by selling investments that have fallen in value. By doing this, investors can offset capital gains from valued assets they have sold.
However, there are caveats and possible snares for those who are not wary.