The market has been volatile lately, and the last thing you probably want to think about is tax preparation.
But the more you know what to expect and the more helpful tips you follow, the easier tax season will be for you now that you are a trader.
With that in mind, let’s take a look at three tax tips to make this season easier for you. The more you read up on the process this year, the easier it will be in the future to manage things like an IRS CP2000 for cryptocurrency when you get one instead of having no idea how to deal with it.
Let’s take a look at these tips.
1. Understand what you may have to pay for
You will likely have to pay taxes on capital gains and dividends. There is a short term capital gains tax as well as a long term option. Short term refers to a stock that you have held for less than a year.
Taxes on unqualified dividends are at the end of your tax bracket. Qualifying dividends can be taxed between 0% and 20%, so you might pay less.
The better you understand how capital gains and dividends work, the easier it will be to make investment decisions over the next year.
2. Know how to pay less
It’s no big secret that everyone wants to pay as little as possible for their taxes. If you think that this is impossible as a stock trader, you are wrong. It’s just a matter of knowing a few tips and tricks and using them to your advantage.
One of the best things you can do is hold onto an asset for at least a year. If you do, you will qualify for long-term capital gains tax, which is usually lower than the short-term option. As a result, you end up paying less for that particular stock.
It’s also a good idea to hold on to dividends for as long as possible. That way, they can receive qualifying dividends instead of becoming unqualified. As mentioned above, you may pay less for qualifying stocks. So it pays to hold the stocks for as long as possible. If you’re tempted to sell before the end of the year, consider the pros and cons, and how much more you could save if you can hold the stock a little longer.
In addition, you can offset your profits with investment capital losses. If your losses for the year are greater than your profits, you can deduct the difference of up to $ 3,000 on your tax return. This is especially important if you have suffered a major loss over the year.
3. Keep the shares in a tax-friendly account
One of the best things you can do for your dividends and capital gains is to invest in a Roth IRA or a traditional IRA. These are tax-free or tax-deferred. You can also put them in a 401 (k) and never pay taxes on investment growth or interest. The only “catch” is that the money has to stay in this account.
If you are unfamiliar with these account types or have never opened an account before, contact an investment broker or your local bank to set up an account. It’s easier than you might think and a great way to give yourself financial security for the future.
Bonus – Work with a tax advisor
If you are just starting out in trading or investing don’t be afraid to partner with a professional when it comes to your taxes. Even if it only takes a year, you will learn a lot, and a tax advisor’s job is to make sure you get every possible allowance. So don’t be afraid to work with a reputable company or person.
Also, make sure to ask questions along the way. In the end, you can make the decision whether you want to employ a professional year after year. But the more you know what they are doing and how to keep as much of your money as possible, the more you will help as you keep investing and buying new stocks.
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