If you are just starting out in the stock market, you may be wondering how you will be affected by taxes. Will you owe money on your gains and how much? What if you lose? And what if you lose on some stocks and have gains on others?
Lets use an example and say that you bought and sold your first stock and made a gain. That's great but you now you will owe taxes! You will have to send the IRS the tax at the end of the quarter and you will have to learn how to do that. It is not like your paycheck where the taxes are automatically deducted. If you invest in stocks, you are going to have to keep track of everything and send the IRS their cut every quarter you have a gain.
When tax time comes you are going to have to fill out Schedule D and report your gain. If you are going to be investing in the stock market you are going to have to keep track of every transaction whether it is a gain or a loss. Again, the government is not going to do it for you and you will have to request an estimated payment form and send in your money quarterly.
Every stock sale you make, including losses, is going to have to go on that Schedule D at the end of the year. If you are going to trade stock, you have to understand and accept this. There is no getting around it as the brokerage companies are required by law to report all your transactions to the IRS. If your records do not match what is reported, this will trigger a red flag and you may very well be audited. If not audited, you will at least be contacted by the IRS and told that your records don't match what was reported by the IRS. Can penalties be far behind?
If you sell stock and have a loss for the year, you can use up to $3,000.00 of that loss. If your stock trading loss is bigger than $3000.00, the amount over that has to be carried over until the next year. This is difficult to understand and is a very unfair rule made up by polititians who think that only rich people invest in the stock market. If you have an overall loss of any amount over $3000.00, you really are allowed to only deducted $3000.00. This can be very problematic for someone who has big losses for the year.
The stock market is a hard enough place for beginners and when you add in the tax record keeping it can become a little overwhelming. Unfortunately for all of us, the government doesn't care.
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