When filing your taxes, it's important to make sure you have everything you need to ensure a smooth process. If you frequent trading in the stock market, you have to report stock trading information on your taxes.
Profits from trading in the stock market are considered capital gains and have to be reported on a person’s taxes. The form necessary is Form 1040, Schedule D. When filing, knowing what tax rate you can expect is also important.
How are capital gains taxed?
There are two types of capital gains tax. Short-term capital gains tax is on profit from an asset sale held for a year or less. Short-term tax gains fall in the same bracket as a person’s usual tax bracket. Long-term capital gains are from an asset sale that was held longer than a year.
Depending on a person’s taxable income and filing status the tax gain percentages can be 0 percent, 15 percent, or 20 percent. Dividends from stocks are considered taxable income as well. In dividends, there are qualified and non-qualified.
Non-qualified dividends are subject to the same tax rate as their normal income tax bracket rate. The tax rate for qualified dividends is the same for long-term capital gains. According to the IRS, the tax rate for most people isn’t higher than 15 percent. Also, most of the net capital gains can be taxed at 0 percent if the filer's income is $40,400 or less if single or $80,800 if filing jointly.
The IRS quantifies the tax rate of 15 percent by the following:
- if the taxable income is more than $40,400 but less or equal to $445,850 if single
- if married and filing jointly, or a widow over $80,800 but less than or equal to $501,600
- more than $54,100 but less than or equal to $473,750 for the head of household
- more than $40,400 but less than or equal to $250,800 if married filing separately
The 20 percent capital gains tax rate applies if the income of the filer is greater than the 15 percent thresholds. There are instances when a person might be taxed higher than 20 percent. Taxable gains from small business stock (section 1202) or capital gains from selling collectible are taxed at 28 percent. Selling “section 1250 real property” is taxed at 25 percent.
What happens if you don't report capital gains?
If you don’t report your taxes due to a mistake or an intentional omission, you will hear from the IRS. If the IRS discovers that taxes were underpaid due to capital gains not being reported, the filer will be subject to paying a late fee of 0.5 percent of the overdue amount for every month it’s late.
Also, the IRS charges interest on past-due taxes, and the interest is compounded daily. If the situation is due to intentional omission, the filer can be subject to negligence payments of 20 percent of the past due amount in addition to the previously mentioned penalties.
In addition to the negligence penalty, the filer can also be charged with a fraud penalty, which is 75 percent of the unpaid portion along with the above-mentioned penalties. There are some situations where filers can be charged with tax evasion, which includes a penalty of up to 5 years in prison and a $250,000 fine.