My 20 something son makes about 20,000 a year as a asst mgr for a popular fast food franchise so he's in a fairly modest income bracket. He bought about 4000 of his companies stock last year and sold it this calendar year for 6000. He took his 2000 profit and rolled into buying more stock of a different company. What is his prospective capital gains tax for his 2015 taxes?
An help appreciated.
If I understand it correctly, if he held the stock less than 365 days, it is taxed as the same rate as earned income (short-term capital gains). If he held it more than 365 days, the tax rate depends on his tax bracket. For an annual gross income of $20K, I don’t think there would be any long term capital gains (15% tax bracket). Of course, I am not a tax lawyer and really know nothing except what I google, which I probably don’t do correctly.
excavating is correct. If he held the stock for longer than a year before selling it, he has a long-term capital gain of 2000.00, which is eligible for special tax treatment. In your son’s case, because his income is so low, he would probably pay no tax on that gain, but of course it would still have to be reported to the IRS.
If he held the stock for less than one year, he has a short-term capital gain of 2000.00, which is not eligible for special tax treatment. It is taxed as part of his regular income, as if he just had an extra 2000.00 tacked on to his salary.
And yes, that means it has to be held for 365 days to be considered a long-term capital gain (longer than one year). If he held it for 20 days or 200 days or 364 days, it’s a short-term capital gain.
This is all assuming your son made this investment on his own, and not as part of an Employee Stock Purchase Plan that allowed him to purchase company stock at a discount via paycheck deductions. If that is the case, the treatment will be a bit different.
I am studying for the CPA exam, but I am not a CPA. I am an accountant, but I am not a tax accountant. I will defer to any other better experts that come along.
Interesting how the long term scenario means that if you earned it by working you will pay more than if you just had some capital around that you could afford to risk. But, hey, ain’t that America folks!
The stated logic behind giving long-term capital gains special tax treatment is to encourage long-term investing, which is considered a social good. That’s because short-term trading can destabilize the market while holding investments stabilizes it.
Whether it works or makes any sense or whatever for that purpose is another topic of discussion, outside the purview of GQ I’m sure.
Legal advice is best suited to IMHO.
Colibri
General Questions Moderator
Thanks for advice!
Your son should consider starting a Roth IRA. There are advantages and disadvantages, but starting a retirement account early is a great lesson in planning for the future.