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Stock Trading Taxes Basics for Beginners

The Basics of Stock Trading Taxes for Beginners

If you're a beginner and you're wondering, all right, how do taxes actually work, I just want to go over a very basic premise here of what you should understand and how it all works.

The Basics of Stock Trading Taxes for Beginners

With that being said, a full disclaimer on my part, I am not a professional tax attorney, CPA, anything like that. So I'm not telling you and I'm not gonna get down into the weeds of taxes and all of the loopholes and how this, that, and the other works because those things are always changing. And to be fair, what I talk about here, I suppose that could potentially change too, but I don't foresee it changing anytime soon.

But again, I'm just addressing this from somebody that's brand new in the market, just getting started, and they're a beginner and simply wondering how do taxes work from a basic perspective? And I don't mean to insult anybody's intelligence, but just to break down how all this works is this is gonna be you and you're gonna go and you're gonna make a trade.

Trade being you're gonna buy and then you're gonna sell. So you buy a stock and then you sell a stock. Now, when you make the trade, there are gonna be two outcomes. You are either going to make money or you are going to lose money.

I see a stock, I want to trade, trade meaning I buy and then sell it, and then the result of that, the outcome, is gonna be you're either gonna make money or lose money. So one of the big questions I get is okay, well, Clay, how do the taxes work on that? There are no taxes on this exact trade. So let's say you do make money on a trade, do you pay taxes at that exact moment in time? You do not.

You don't pay taxes. It's not like you have to send a check to the IRS or anything like that. Nothing happens at that point in time. Well, should I be keeping track of how much money you make? Kind of, but what I mean by that is your broker, the person that's allowing you to buy and sell, is going to be tracking all of that.

You'll have account statements, you'll have profit and loss, and all that sort of stuff. So they're gonna track all that so it's not like you have to sit there with your own spreadsheet and calculator, nothing like that.

Everything is being tracked for you. But at this moment in time, you're not gonna be paying any taxes. But what is going on, and to circle back to what your broker is doing, is that from a yearly perspective, so over a year's time, what your broker is doing, it is gonna be wondering how much money has been made?

 It's gonna be tracking for you and wondering how much money has been lost? So over the year, and I should probably put this, this is what your broker is doing for you. Clay, what's a broker? Is that the same thing as an app? Yes.

So the Robin Hood app, that's the same as a broker. The Webull app, that that's the same as a broker. But any broker is gonna be tracking all that over the course of a year, one year. They're gonna be tracking how much money you make, how much money you lose. At the end of the year, they're gonna add up these numbers.

So they're gonna add up, well, here's how much money they made, here's how much money they lost. And right here, you have, once again, two outcomes. The two outcomes being, well, you either make money for the year or you've lost money for the year.

If you make money for the year, so situation number one, you make money, that money that you make, you will need to pay a tax on, known as short term capital gains. Well, what is that rate gonna be? I have no idea. It's always changing. That can be a political topic. But the point here is you pay tax at the end of the year on money that you make. Maybe you say, okay, well, my broker added everything up and then I'm looking over here and I actually lost money.

Well, in that situation, you get a tax write-off, meaning you can write off a little bit on your own taxes. Now, how much of a write-off? Again, I'm not gonna go into that because that number can always change. And to be fair, maybe the tax write-off goes away at some point. Who knows, in a perfect world, maybe even that tax would go away. Wouldn't that be nice? But we won't go down that rabbit hole. The point here is you might get a tax write-off, but it is limited.

So it's not like you go out there and lose $500,000 and you can write off $500,000. But there is gonna be a tax write-off if, again, at the end of the year you lose money. But that's how it works at the core is you go out there, you make a trade. On that individual trade where there are two outcomes, it matters but it doesn't matter. It doesn't matter in the sense of, again, if you make money, you don't have to sit there and okay, let me write a check, you know, lemme Venmo the IRS some money. You don't wanna do that. You don't need to do that.

All that needs to happen is at the end of the year, that is when your broker is gonna spit everything back out at you. And really what I would advise, what I do, is you just print out the account statements, you hand them to your accountant and say, hey, do your thing at that point. Now, if you know that you're making a bunch of money, so, again, you can watch it, so as the year goes on, wow, I'm making money, wow, I'm making money, you're gonna want to broadly set aside some of that money.

Well, how much money? Well, that's where you would want to know what is the capital gains tax? What is the capital gains rate? So, for example, and I'm not saying this is it, let's just say it's 10% to keep the math easy. If you know you've made $10,000 and you know the capital gains rate is 10%, then you better set aside right around $1,000 because come tax season, you're gonna have to ultimately pay on that.

So you are gonna want to monitor it from a bigger picture perspective and that way you don't get any nasty tax surprises. But my core point here is at the moment the transaction and trade starts and ends, there are no taxes that need to be paid at that point in time. But that is the basics of trading taxes. It's only after the trade's been done and it's only after the entire year has been in a play where you're gonna have an overall idea of how much you actually owe. 

And then as a side note, if you're someone that's like well, I don't really want to trade, Clay, I want to invest, so how does that work? You only will pay if you buy and sell an investment. However, if you get dividends, then there will be some taxes associated with that, so that's just something to keep in mind. And then, of course, you always have tax-friendly accounts, 401ks, IRAs, that can help shield you from all this stuff to an extent, but I'm not gonna go down those rabbit holes because the idea here is just to really hit up those beginners that are wondering how exactly it works because I get questions every now and then that pretty much you're saying, man, this sounds like a hassle, Clay.

So if I'm making money on a trade, I gotta send the IRS a check at that moment in time? It's not that much of a hassle, but, as I said, your broker is gonna keep track of it for you. And then at the end of the year, they're going to spit you back the tax return and it's gonna tell you whether or not you're gonna have to be paying taxes if you made money or if you get a tax write off because over the entire year you lost money and then you just let the accountants do their things. 

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