The most important thing to understand is you
only pay taxes on investments when you “realize”
their gains. So if you bought a stock in 2020 and
its value went up — you won’t pay taxes on
those gains until you sell. And if it sank in value,
the same rules of “realizing” apply. It hurts to
have a loss but you can use those to offset your
gains, up to a limit.
It’s also important to understand that gains are
taxed differently depending on how long you
held on to the investment. If you sell a stock
you held for less than a year, they are taxed
at the higher short term capital gains rate,
versus the lower long term capital gains rate
for investments held for more than a year. And
if you are a higher income household, you may
also face a net investment income tax on capital
gains and other investment income.
Made a killing at GameStop or another short
squeeze? That won’t come up until 2021 taxes,
which aren’t due until next year. But it would be
wise start making plans or anticipated payments
on those taxes now.
Some types of trading activity can be
complicated, so it may be wise to seek
professional help in preparing your taxes.
FRAUD
Taxpayers may face a new challenge this year
due to rampant unemployment fraud.
While millions of people sought legitimate
unemployment benefit claims during 2020,
scammers seized on the opportunity to commit
identity fraud and make fake unemployment
claims. California alone paid out $10.4 billion in
fraudulent claims, according to a recent audit.