You rode the wallstreetbets wave and won. Well done! You are now the proud owner of a capital gain, that’s taxed at a favorable 15%, right? In many cases, yes; however, if you failed to hold Gamestop stock for more than 12 months (prior to selling), you don’t have a long-term capital gain; you have a short-term capital gain. What does that mean for your 2021 tax bill? Let’s press pause and check the instruction manual:
How are Short-Term Capital Gains (STCG) Taxed?
If you sell stock at a gain, and owned it for one-year or less, you have a STCG. STCG’s are taxed at ordinary income tax rates (up to 37% for 2021). Additionally, the 3.8% net investment income tax may apply, and let’s not forget state income taxes: Massachusetts taxes STCG at 12%.
Conversely, if the underlying property was held for more than one-year, you have a long-term capital gain (LTCG). Federal tax rates for LTCG’s range from 0% to a maximum rate of 20%, depending on income levels. The 3.8% net investment income tax may still apply, but state income taxes are generally lower: Massachusetts taxes LTCG’s at a flat 5%.
Best Explained Using The Player Walkthrough:
Level 1 (Short Term): Link purchased 1,000 shares of GME @ $14/share in December of 2020. He sold 1,000 shares in January of 2021 @ $347/share, resulting in a $333,000 STCG. Link is single, a Massachusetts resident (recently relocated from Hyrule), and has no other income in 2021. The approximate tax on Link’s $333,000 STCG is:
- Federal income tax: $87,000 (at marginal rates)
- Federal net investment income tax: $5,000 (3.8% of gain after exemption)
- Massachusetts income tax: $40,000 (12% rate on STCG)
- Total Approximate Tax Cost of STCG: $132,000…40% of the taxable gain
Level 2 (Long-Term): Mario purchased 1,000 shares of GME @ $14/share, but he bought them in June of 2018. He also sold 1,000 shares in January of2021 @ $347/share, resulting in a $333,000 LTCG. Mario is single, a Massachusetts resident, and has no other income in 2021 (recently retired plumber). The approximate tax on Mario’s $333,000 LTCG is:
- Federal income tax: $42,000(at long-term capital gain rates)
- Federal net investment income tax: $5,000 (3.8% of gain after exemption)
- Massachusetts income tax: $16,000 (5% rate on LTCG)
- Total Approximate Tax Cost of LTCG: $63,000…only 19% of the taxable gain
What a difference a year makes, right? It’s important to remember that, in the case of Gamestop, holding stock for more than a year probably wouldn’t make economic sense (given the price is dropping, fast). If you beat the game and came-out on-top, it would have been impossible to avoid STCG treatment, unless you bought-in early (like Mario).
Before you reinvest or spend those gains, it’s critical you understand the general tax implications. Depending on your specific tax situation, there are many alternate endings to this game. Withum is here to help you prepare and plan for that final IRS battle, ensuring you come out on-top, ready to pre-order the sequel.
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