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  • Nick Burgess

Do You Have To Pay Taxes On Stocks You Don't Sell?

The following article is for entertainment and educational purposes only, and should not be considered financial advice. Please contact a licensed financial professional for individualized advice. Some links below may be affiliate links that generate a small commission for the site at no cost to you.

 

Do You Have To Pay Taxes On Stocks You Don't Sell?

Well, we've officially reached the nadir of the sports calendar. Football is in rookie camps, soccer is currently shipping all of their players to Saudi Arabia, Nikola Jokic is back in Serbia riding his poor horses and Wimbledon is as exciting as it gets this time of year because what are you gonna do - watch baseball?

a sheet of paper that reads "capital gains tax" on top of an income tax return document

So, in the interest of entertaining myself for a little bit, let's answer a question that's been doing the rounds for the last few months since the Biden administration's infrastructure bill has passed through Congress like a hot bullet through a high school. But let's chat through the in's and out's of taxes through the lens of sports, because who doesn't like sprinkling in a little added excitement with their capital gains?


So... do you have to pay taxes on a stock you haven't sold yet?


1st Quarter: Short-Term Gains vs. Long-Term Gains

In the world of stocks, like in basketball, timing is crucial. Short-term capital gains are the equivalent of slam dunks that electrify the crowd. They're gains from stock sales that you've held for less than a year, so basically your portfolio's slash and kick to the basket.

If you sell and net gains, you're looking at ordinary income tax rates - the higher rate. Conversely, long-term gains are like the well-planned strategies of a whole season - they represent the sale of stock you've held onto for longer than a year. They're taxed at a lower rate, the long-term capital gains tax rate. Just like in the game, patience can pay off!

2nd Quarter: The X’s and O’s of Capital Gains Taxes

You’re sitting there, staring at your tax forms, feeling like Joe Mazzulla staring at Jimmy Butler, trying to figure out an experienced team's defense strategy. The cost basis, which is essentially the purchase price of your shares of stock, is where it all starts. The sale price, that's where you cash in. The difference between these two figures will give you either capital gains or capital losses. But remember, it's not about the gross income; it's the net gains that matter.

Halftime Adjustments: The Double-Edged Sword of Mutual Funds

Remember Dwight Howard? Just by looking at his stature on the court, you would assume he's the best player that's ever played basketball. But then if someone off the street told you that their favorite player in the league was Dwight Howard, you'd immediately stop being friends with that person.

Well, mutual funds are the Dwight Howard of investment vehicles – they are a fantastic way to diversify, but their past performance can sometimes make them a tax burden. At the end of the tax year, the fund manager might distribute capital gains, and guess what? Yep, you owe capital gains taxes on those, even if you reinvested them back into the fund. A bit like a superstar demanding a max contract after a single good season, right *cough* *cough* Tyler Herro *cough*.

3rd Quarter: The Offense - Reducing Your Tax Bill

Legendary San Francisco resident Steve Kerr refers to the beginning of the third quarter as the most critical. It's when you can come out firing and steal the momentum of the game, which is why his Warriors are the greatest statistical third-quarter team in NBA history.

So, you know what they say: the best defense is a good offense. The same goes for your tax bill. Using tax-advantaged accounts like a Roth IRA or other retirement accounts can help minimize your tax liability. Remember, my friend, even the best teams use service providers like investment advisory services or a financial advisor to guide them. So, don't hesitate to seek help from a registered investment advisor or a financial planner.

4th Quarter: Lockdown Defense - Understanding Tax Deductions and Losses

On the flip side, if you face capital losses, it's like losing a few games in a row - disappointing, sure, but not the end of the world. The Internal Revenue Service lets you use these losses as a tax deduction from your taxable income - it's kind of like a tax break after a losing streak. This strategy, known as tax-loss harvesting, can lower your overall tax burden.

However, there are nuances to this. You cannot sell an asset at a loss and then repurchase that asset within a 30-day window. That's called a "wash-sale" and, while it sounds like something high school kids do to raise money, it's critically important to understand when it comes to capital losses. The IRS does not fuck around, and they fuck in a very unpleasant manner.

Overtime: Other Investment Opportunities

If you're tired of the stock market's rollercoaster ride, there are other courts to play on, such as real estate and exchange-traded funds (ETFs). But remember, just like changing sports, changing your investment strategy requires understanding the new rules. Rental income, depreciation, and the opportunity zone tax benefits are all part of the real estate game. And as always, an investment advisor can help you figure out your game plan.

Post-Game Analysis: Prepping for Tax Season

Tax season is like the playoffs of the financial year - it's where all your moves throughout the year culminate into a mid-post pick and roll and Trae Young gets hunted on defense. Your dividend income, capital gains, and even your salary (hello, ordinary income tax rates!) all come together on your tax return as a big ball of untaxed profit you owe money on, but paying that is still less painful than listening to Kendrick Perkins provide analysis.

Conclusion

My friend, navigating the finance world might feel like coaching a team in Game 7 of the NBA Finals, but you're not alone. From finding your tax bracket and filling out your Schedule D, to calculating your net investment income tax and handling your Form 1099-B (told you it was confusing), there's help available. Tax advisors, financial products, and service providers - they're all there to ensure you don't violate the rules set by the Internal Revenue Service and the Securities and Exchange Commission.


Remember, your financial decisions shouldn't be made based on last year's performance or the fear of future years. It's about understanding your specific situation - your income level, your filing status, and your long term financial goals.

Disclaimer: This material has been prepared for educational purposes only, and it's not intended to provide, and should not be relied on for, tax, legal or investment advice. You should consult your own tax, legal and investment advisors before engaging in any transaction.

That's it from me, folks. Don't let the jargon intimidate you. In the end, it's all just a game - learn the rules, plan your strategy, and always, always, be ready to adapt.

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Oct 28, 2023

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