Did You Make Money on GameStop? The Tax Man Is Coming
Posted Feb 1, 2021
GameStop is the hottest topic in stocks these days, and if you were lucky enough to own some shares, you may have enjoyed as much as 8,000 percent increase in value over the past 6 months. You may be wondering what happened. GameStop is actually struggling as the market shifts from favoring in-person shopping to online sales, and COVID-19 has only exacerbated GameStop’s problems. Like many struggling companies, GameStop was the subject of what is called short selling, in which investors borrow shares of stock at a certain price in expectations that the market value will fall below that level when it is time to pay for the borrowed shares. They are basically betting that the company will fail. Unfortunately for the hedge funds that were short-selling GameStop, amateur investors on Reddit were building hype for GameStop and buying up shares, driving up the price. Long story short, the volume of sales traded spiked on January 29th, and many people who had bet against the stock gave up and took their losses. GameStop shares shot up from $43 to as much as $380 a share.
So what happens next if you were in on the frenzy? Keep in mind that no tax will be withheld if you sell your shares of stock. If you held the stock for less than a year and then sold your shares, be prepared to pay short term capital gains tax on your 2021 tax return, due in April of 2022. Short term capital gains are taxed at your ordinary income tax bracket, starting at 10% and rising to 37%. There is also an extra 3.8% net investment income tax that applies to individuals making more than $200,000 or married couples making more than $250,000.
If you bought shares earlier and held them for longer than a year (one year and one day, at least), the proceeds are eligible for favorable long term capital gain tax rates. The rates are 0%, 15%, or 20%, depending on your total income.
All of these tax consequences hinge on whether the stock has been sold. If you buy and hold the stock, there is no tax consequence until the stock is sold.
Also be mindful of the wash sale rules. If an investor sells or trades a security at a loss, and within 30 days before or after the sale, buys a substantially identical stock or security, or acquires an option to buy a stock, this is called a wash sale and no capital loss can be taken against the gain.
All of your taxable stock transactions will be reported on a 1099B which you can use to prepare your tax return, or give to your accountant to prepare your taxes.
If you have additional questions about how your stock transactions impact your taxes, please call our office at 828-324-1661.
Sources:
https://www.nbcnews.com/business/business-news/gamestop-reddit-explainer-what-s-happening-stock-market-n1255922
https://www.cnbc.com/2021/01/29/gamestop-short-sellers-are-still-not-surrendering-despite-nearly-20-billion-in-losses-this-year.html
https://www.investopedia.com/articles/personal-finance/101515/comparing-longterm-vs-shortterm-capital-gain-tax-rates.asp
https://www.investopedia.com/terms/w/washsalerule.asp