Unfortunately before you get too excited about the money you have made as a stock investor, you will have to pay taxes. However, there are a few tricks that can save you some money. Keep in mind that I have listed only the most important tax information for stocks investors. If you want in depth info, you will have to buy a book about it.
Profit that you make in the stock market can be taxed in two ways. As ordinary income and as capital gain.
Long term capital gains are taxed lower (around 7 percent) than short term capital gains. To qualify, you will need to hold on to your stocks for at least one year and one day. However, don't hold onto your stocks if it's not doing well, or don't sell your stock if it is doing well, just to qualify for lower tax bracket. Remember, you pay taxes only after you sell the stock. So if you sell your stocks earlier than one year and a day, you will have to pay taxes on short term capital gain.
Capital loss
Capital loss can actually decrease your taxes. For example, if you have invested $5,000 into a company, and sold at $2,200, your capital loss would be $2,800. This loss is tax deductible. Basically it can go against your income and lower your overall tax. However, in one year you can only deduct $3,000. So if you have lost $5,000, you can only deduct $3,000. The good thing though is that you can carry over this to the next year, so the remaining $2,000 you can deduct during the next year. However, if in your portfolio you lose $5,000 on one stock, but gain $6,000 on the other, you still have capital gain of $1,000. So, whenever possible, keep loses on a short term basis, and gains into long term status.
Beware of wash sale rule: If you sell the stock for a loss and buy it back within 30 days, the loss isn't valid because you did not make any substantial investment change. So wait for at least 31 days before reinvesting into that same stock.
Dividends are taxed as ordinary income, even ones that get reinvested. However, dividends from tax sheltered plan such as IRA or 401(k) plan do not get taxed, as long as they stay in the plan.
Profit that you make in the stock market can be taxed in two ways. As ordinary income and as capital gain.
Long term capital gains are taxed lower (around 7 percent) than short term capital gains. To qualify, you will need to hold on to your stocks for at least one year and one day. However, don't hold onto your stocks if it's not doing well, or don't sell your stock if it is doing well, just to qualify for lower tax bracket. Remember, you pay taxes only after you sell the stock. So if you sell your stocks earlier than one year and a day, you will have to pay taxes on short term capital gain.