Stock VIP Tax Write-Up333 PDF

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Taxes on Trading DISCLAIMER: -

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This material has been prepared only for educational and informational purposes only on subject matter. It is not intended to serve as or be relied on for tax, legal or other financial accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction or taking any tax position. Each individual’s situation is different. Thus, consulting a tax professional is strongly advised.

PREFACE: -

This write-up is applicable to United States Citizens only. The use of the word “stock(s)” is meant to represent the trading instruments discussed within StockVIP (i.e. stocks, securities, options, cryptocurrencies, etc.) The use of “Brokerage” or “Brokerage account” = whatever you’re using to trade (for example, Robinhood, Webull, TD Ameritrade, Fidelity, etc.) “ST” = Short Term (less than 1 year) “LT” = Long Term (more than 1 year)

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YOU ARE ONLY TAXED ON THE PROFITS YOU EARN FROM SELLING STOCKS. YOU ARE NOT TAXED ON THE MONEY YOU USED TO INITIALLY BUY THE STOCKS. Profits/losses from trading stocks are considered CAPITAL GAINS/LOSSES. There are 2 categories of capital gains/losses: short term, and long term. a. SHORT TERM = Stocks held for LESS than 1 year b. LONG TERM = stocks held for MORE than 1 year. Form 1099 is provided, by trading platforms, to report your capital gains/losses. Your broker/platform will send you this form and/or has copies of this on their website for you to access on demand. This should be available to you January 31st of the following year (2020’s 1099 Forms will be available in the January 31, 2021). Your brokerage also sends 1099 Forms to the IRS, so they already “know” if you gained or lost money. The number of trades/transactions you make is not applicable to taxes. The only thing the IRS cares about is the MONEY YOU GAIN OR LOSE during the year. “Net gains/losses” = total gains for the year MINUS total losses for the year. Read this article and watch the video: https://www.investopedia.com/terms/c/capital_gains_tax.asp#citation-1

--As mentioned above, YOU ARE ONLY TAXED ON YOUR PROFIT WHEN YOU SELL A STOCK. When you sell a stock, you (hopefully) make a profit which is what triggers a taxable event (losses are discussed later). For example, stocks you own can appreciate every year, but you will not be taxed for those gains until they are sold, no matter how long you happen to hold them. This is because you have not actually received any profit since you have not sold the stock, thus there is nothing to be taxed. It is not until you SELL the stock that you will recognize the profit which will then need to be taxed. To calculate your profit/loss on a sale of a stock you can use this simple formula:

Sale price – Purchase price = PROFIT or LOSS If you trade often, you will more likely than not see both PROFITS and LOSSES during the year. These profits and losses are combined to come up with your NET PROFIT or NET LOSS (which are treated differently for tax purposes). Keep in mind that the IRS only cares about the SALES that you have made within the calendar year (January 1 – December 31) when figuring out your NET PROFIT/LOSS. EXAMPLE: You buy 500 shares of SPAQ on 3/16/2020 for $10 per share for a total of $5,000. You then sell those 500 shares on 7/10/2020 for $15 per share for a total of $7,500. Your profit is $2,500 ($7,500 - $5,000 = $2,500) You buy 100 shares of KODK on 7/31/2020 for $20 per share for a total of $2,000. You sell those 100 shares on 8/11/2020 for $10 per share for a total of $1,000. Your loss is $1,000. ($1,000 - $2,000 = $1,000) Your NET GAIN is $1,500. ($2,500 gain - $1,000 loss = $1,500 NET GAIN) The next factor to consider is how long you own a stock for. This determines the rate at which you will be taxed at for each different sale. Stocks that are held for less than a year are considered SHORT TERM, and on the contrary, stocks that are held for more than a year are considered LONG TERM. Generally, SHORT TERM GAINS are taxed at the ordinary rate that you would apply to your income from salary/wages, meaning that these gains are added to your earned income. You're taxed on the shortterm capital gain at the same rate as for your regular earnings. Tax rates for 2020 can be found below, or at https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2020.

LONG TERM GAINS are taxed at 0%, 15%, or 20% depending on tax bracket. It is essential that you keep in mind that SHORT TERM and LONG TERM gains/losses need to be segregated since they are taxed differently. The long term tax rates can be found below, or at https://www.irs.gov/taxtopics/tc409.

EXAMPLE: You buy 10 shares of AAPL on 2/1/19 for $40 per share for a total of $400. You hold the stocks for 1 year and five months and sell the 10 shares on 7/1/2020 for $100 per share for a total of $1,000. Your profit is $600 and is considered a LONG-TERM GAIN. You buy 10 shares of TSLA on 3/18/2020 for $70 per share for a total of $700. You hold the stocks for 2 months and sell the 10 shares on 5/17/2020 for $160 per share for a total of $3,200. Your profit is $2,500 and is considered a SHORT-TERM GAIN In the unfortunate event that you have a NET LOSS for the year, you can use this LOSS to reduce your taxable income by up to $3,000 per year (filing taxes as single) or $1,500 per year (filing taxes as married filing jointly). If your losses are more than $3,000 (single) or $1,500 (married filing jointly) for the year, the remaining amount after deducting the initial $3,000 or $1,500 can be carried forward to the following year and used to offset any profits you make from selling stocks and then reduce your taxable income again. You may use the Capital Loss Carryover Worksheet found in Publication 550, Investment Income and Expenses (PDF) or in the Instructions for Schedule D (Form 1040 or 1040-SR) (PDF) to figure the amount you can carry forward. (https://www.irs.gov/taxtopics/tc409) In the case that you have a combination of LONG and SHORT term sales, meaning that you sold stocks during the year which you held for more than 1 year AND you sold stocks during the year that you held for less than one year, there are a some things you need to understand: 1. Net SHORT TERM GAINS are taxed as ordinary income. 2. Net LONG TERM GAINS are taxed separately at the reduced rates of 0%, 15%, or 20% as mentioned above. 3. Net SHORT TERM LOSSES will first reduce your net LONG TERM GAINS, then will reduce your ordinary income. a. If you do not have any net LONG-TERM GAINS, then the total net SHORT TERM LOSSES will reduce your ordinary income. 4. Net LONG TERM LOSSES will reduce your taxable income. If you don’t keep these rules in mind and treat your long- and short-term GAINS/LOSSES the same, you may end up paying more taxes than you should, or not paying enough.

Q&A / Scenarios: 1. If you trade using an IRA account, the gains are tax free. a. Correct. Investors who earned short-term gains from an investment that was in an individual retirement account (IRA) do not have to pay any short-term capital gains taxes on that income. However, if an investor takes out any money from the IRA, the withdrawal amount is considered income and is taxed at the investor's or taxpayer's ordinary income tax rate. The benefit to IRAs is that investors can grow their investments over the years without paying any capital gains taxes. In other words, the taxes on the gains are deferred, but once the money is withdrawn, it's taxed at the current income tax rate for that investor. (https://www.investopedia.com/terms/s/short-term-gain.asp) 2. What % are you taxed on profits from day trading and swing trading? a. Day trading profits are taxed at your ordinary income tax %. If your swing trade is less than a year you are taxed at your ordinary income tax %. If your swing trades are more than a year you are taxed at 0%, 15%, or 20% depending on your taxable income. 3. If you switch brokerages you have to submit that with your taxes? a. False. Both brokerages will each send you a FORM 1099 that will lay out your track record of gains/losses for the year for the transactions you conducted while on their platform. 4. The longer you’ve had money in the brokerage acct the lower the taxes will be on profits/losses. a. False. Stocks that you SOLD that were held for more than a year are taxed at better rates than stocks you SOLD that were held for less than a year. The length of time that MONEY is in your account does not have any impact on your taxes. 5. What all should I prepare for in terms of taxes to start seriously trading? a. A good rule of thumb is to save ~25% of all profits to be applied toward taxes. Remember your exact % of tax is dependent on many different factors such as your taxable income amount before PROFITS from trading, the length of time you are holding stocks before you sell them (less than or more than one year), and the losses you have from trading. But also, be mindful of the rules that Uncle Sam has outlined about a “trader” vs. an “investor”. Information on this can be found at https://www.daytrading.com/taxes/us. 6. How do taxes play into investing/trading? Is it when u withdraw from your brokerage account that you pay taxes or do u need to submit your reports with your tax return? a. Generally, for a typical trading account, taxes are not taken out of your account or paid on your behalf by your brokerage. You are responsible for reporting your PROFITS/LOSSES on your tax return that you prepare. Your brokerage(s) will provide you with a Form 1099 that includes this information. 7. Does your brokerage tax you? If so, how much.

a. Your brokerage is not the IRS. They do not tax you. 8. Do you have to pay taxes if you reinvest your profits? a. YES. Anytime you sell stock and have a profit, this is a taxable event. Those gains go into the equation of your NET GAINS/LOSSES for the year. Reinvesting those profits does not defer or exempt you from paying taxes. 9. When you pay taxes on the stocks you sell, do you pay a % of the total sale price or of the profits? a. The profits. Your total sale price is a combination of your purchase price (which is not taxable) and your profits (which are taxable). 10. Less transactions (or times you sell a stock) = less taxes? a. NO. You are taxed on your NET PROFITS/LOSSES. It doesn’t matter how many trades you make in order to get to your final $ PROFIT/LOSS. But, be mindful of the rules that Uncle Sam has outlined about a “trader” vs. an “investor”. Information on this can be found at https://www.daytrading.com/taxes/us. 11. If you make profits on some stocks you sell but then lose money on other stocks you sell do your profits still get taxed? What if your profits are exactly equal to your losses? a. No, you do not pay taxes on JUST the stocks you sold for a profit. Your profits AND losses are combined to calculate your NET PROFIT/LOSS which is then applied to your taxes (be mindful that SHORT TERM and LONG TERM gains are to be segregated since they are taxed differently) If you break even, you have made no money, thus there is no profit to be taxed. 12. How do taxes work for individuals under 18? a. Just like the money you made from your first job at Wendy’s – you are taxed the same as everyone else. 13. If I am under 18 and trade stocks with a “custodian” account with my brokerage, how does this affect my taxes? a. Although custodian accounts are not tax-deferred, they do have some tax advantages. The IRS considers the minor child the owner of the account, so the earnings in it are taxed at the child's tax rate. Every child under 19 years old—24 for full-time students— who files as part of their parents’ tax return is allowed a certain amount of “unearned income” at a reduced tax rate. As of 2019, the first $1,050 of unearned income is taxfree, and the next $1,050 is taxed at the child’s bracket of 10%. Unearned income of more than $2,100 will be taxed at the parent's rate. However, once the minor reaches the age of majority in their state of residence, they can file a tax return of their own. At this age, all of the account earnings will be subject to the beneficiary's tax bracket at the age of filing. (https://www.investopedia.com/terms/c/custodialaccount.asp#:~:text=While%20not%2

0tax%2Ddeferred%2C%20as,do%20have%20some%20tax%20advantages.&text=As%20 of%202019%2C%20the%20first,taxed%20at%20the%20parent's%20rate.) 14. Where on my tax return do I report my profits/losses from trading? a. You report most sales and other capital transactions and calculate capital gain or loss on Form 8949, Sales and Other Dispositions of Capital Assets (PDF), then summarize capital gains and deductible capital losses on Schedule D (Form 1040 or 1040-SR), Capital Gains and Losses (PDF). (https://www.irs.gov/taxtopics/tc409) 15. If I receive dividends from the stocks that I own, are those taxable? a. YES. Although dividends are considered “capital gains” THEY DO REPRESENT A PROFIT. Thus, in the U.S., dividends are taxed as ordinary income for taxpayers who are in the 15% and higher tax brackets. (https://www.investopedia.com/terms/c/capital_gains_tax.asp#citation-1) 16. What’s the best way to defer my capital gains? a. First, read this: https://www.forbes.com/sites/brucebrumberg/2019/11/05/taxstrategies-6-ways-to-defer-or-pay-no-capital-gains-tax-on-your-stocksales/#381e2d87ae19 Second, talk to a tax advisor. 17. If my only income is from trading, how does this affect how my gains/losses are taxed? a. Generally, you will be taxed at ordinary income rates. Become familiar with the information found at https://www.daytrading.com/taxes/us, and talk to a tax advisor....