penny stock taxes

Do You Know What To Talk To your Accountant About When It Comes To Tax Time?

Let’s preface this article by saying that we are not tax professionals and that the purposes for this article are just to give ideas on what to discuss with your accountant or tax professional.  If you buy penny stocks or trade any stock for that matter, it’s good to know what you’re in for when it comes to that time of the year. 

Specifically, when you buy stocks, you’re open to what’s known as the capital gains tax. Essentially any profit you take from the sale of a stock held for at least a full year is taxed at a capital gains rate known as “long term capital gains.”

This rate is generally lower than the rate applied to your other income. If you’re in a 25% tax bracket or higher, this rate is around 15%. If you’re in the 15% bracket or lower, the long term capital gains rate is usually around 5%.

When it comes to trading you’ll likely encounter “short-term capital gains.” These are taxed as ordinary income. Basically, any income you get from investments you held for less than a year must be included in your taxable income for that year.  Short term profit will generally add to your annual income and will, in turn could boost your tax bracket depending on how much you make each year.

Are Penny Stocks Taxed Differently?

In short, penny stocks are “stocks,” all the same.  Usually the differences that someone may see would be at the broker end of the equation in the form of different fees.  Some penny stock brokers will charge additional money for giving the ability to buy and sell micro-cap stocks or investments in companies that do not list on the NYSE or NASDAQ.

To determine your taxable profit and give a general idea of what you could be adding to your income, first ask your tax guy, then check out this formula:

Sales Proceeds – Basis = Taxable Profit or Deductible Loss

Something else to know is that your “sale proceeds” can also be lowered by commissions paid to the broker.

Can I Benefit From Tax Selling With Penny Stocks?

As with stocks in general, penny stocks can help offset your annual profits from other things (including stock sales). In many cases, because there is so much volatility, there’s a good chance that there will at least be a few losing stocks in your portfolio by year end. Many investors will take advantage of this and sell stock in a losing position to offset their annual gain.

But be aware of “The Wash Rule”. Usually, the IRS won’t allow an investor to claim a capital loss if stock is sold and then bought back within the same 30-day period. The “wash rule” prohibits things like tax selling if all the intent is to just buy back after taking advantage of a short term loss.  Make sure to ask your “numbers guy” about how to report capital losses too. There are several things to be aware of that are more detailed than this article will go into.

Know Where You Stand

At the end of the day, it’s up to you to keep track. Just like doing your own diligence before you buy a penny stock, it’s important to know how to report your financials. Most of this article discussed taxation ideas for US residents.

So, if you’re in another country, these points may not be as accurate depending on your country’s tax laws. Please make sure to always keep taxes in mind so you can continue to trade penny stocks long into the future.

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