Say a high-income investor bought 100 shares of GameStop on Jan. 4, when the shares traded at $17.25, paying $1,725. Then, the trader sold the shares on Jan. 27, when they hit $347.51, reaping $34,751, for a gain of $33,026. The tax bill, for someone in the top income bracket, would be an estimated $13,475.
And that’s just federal taxes. Many states and cities assess their own capital gains taxes or treat capital gains as ordinary income, which is taxed at higher rates.
Some GameStop traders have indicated that they bought shares in 2019 and have held them for more than a year. In that case, they would be eligible for favorable long-term capital gain tax rates if they realized a gain upon selling. The top rate would be 20 percent; higher earners would also pay the extra 3.8 percent, for a rate of 23.8 percent.
Individual traders may also have capital losses if they sell a stock for less than they paid for it, which can be used to offset capital gains and reduce taxes, said Tony Molina, a certified public accountant and senior product specialist at Wealthfront, an online investment service.
Less experienced investors may sometimes run afoul of tax rules with so-called “wash sales.” In this scenario, an investor with a large capital gain on the sale of one company’s stock seeks to generate a loss to offset the tax bill. So the investor sells shares of a different stock at a loss — but then quickly buys back the stock. That’s a no no.
“You can’t do that,” said P. Evan Stephens, a tax partner with Sensiba San Filippo in San Jose, Calif. If you buy back the same or similar stock back within 30 days, he said, you can’t use the loss generated to offset your gain.
On the radar is a proposal by President Biden to eliminate the favorable long-term capital gains rate for taxpayers earning more than $1 million, and to increase the top tax rate for ordinary income. There have even been rumblings that the changes, if approved, could be made retroactive to the start of 2021. “Is it likely? No,” said Tim Speiss, a partner with EisnerAmper’s personal wealth group. “Could it happen? We don’t know.”