Even for those who don’t follow the stock market, it’s almost impossible not to have heard about the explosion of interest in volatile securities over the last few months. Companies like Gamestop (GME), AMC Theaters (AMC), or one of the endless varieties of cryptocurrency like Bitcoin (BTC) have spawned entire communities of die-hard investors and speculators, many of whom found relatively moderate investments exploding in value in a record amount of time.
However, there is one vital aspect of the process these communities tend to gloss over: the potentially serious tax implications for shareholders.
Taxes are a serious concern for investors
Both savvy retail and institutional investors alike understand a key aspect of successful investing: taxes can seriously affect your gains.
This is why tax-advantaged accounts like IRAs and 401(k)s are a powerful asset to the average investor, and why wealthier investors often employ teams of accountants and attorneys to ensure the fruits of their labor are not evaporated by taxes. Unfortunately, when it comes to the euphoria of seemingly once-in-a-lifetime opportunities like the GME fervor or the explosion in cryptocurrency, taxes are usually an afterthought.
While some lucky early-adopters may have seen their portfolio quadruple or more in value in a short amount of time due to this kind of investment, they should understand that that big, green number above their brokerage account might not reflect their actual gains—and in some cases, a failure to account for the government’s expected share could mean a potentially massive tax bill without the ready ability to pay.
Short-term capital gains
While a thorough discussion of capital gain rates (or losses resulting from an investment) is outside the scope of this post, the fact is that the majority of day-trading (such as the rapid buying and selling of securities like GME over a short span of time) will incur short-term capital gains. Unlike the more favorable tax treatment of long-term gains, which apply to investments held for over a year, short-term gains are taxed at the taxpayer’s ordinary income level.
This can mean, depending on the taxpayer’s income and/or the amount of gain on the investment, a federal tax burden of as much as 37% . This also does not take into account non-federal obligations like state taxes. Windfall investors may be shocked to find that almost half of their total returns are owed in taxes when all is said and done. Investors who fail to account for taxes may encounter a massive tax liability at the end of the year, or worse, may have failed to set aside the funds necessary to cover this obligation.
How to resolve an unaffordable tax bill?
To reiterate, planning ahead for taxes is an essential aspect of any sound investment strategy, and it’s not uncommon for a new investor to wind up with back taxes, penalties, and interest.
Particularly in regards to highly-volatile stocks like GME and AMC or unstable investments like cryptocurrency, it is important to be aware of how gains are taxed, time periods for holding investments, and in the event of a stomach-churning tax bill, take advantage of the services of an experienced tax attorney.
If you’re struggling to deal with a tax controversy, an experienced tax attorney can serve as an invaluable ally.