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Stock Trading – A Brief Overview

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Stock Trading

Stock Trading and Taxes

Many investors look upon stock trading as an easy way to grow their wealth, which is certainly true. However, this form of investment, like any other, attracts a certain amount of tax and it is vital you know about these before you begin stock trading.

Tax on Short-term Capital Gains in Stock Trading

Active traders need to pay a tax for all the profits they make out of investing in the stock market. This short-term capital gains tax is calculated on the basis of your profits on the stocks you hold for less than one year. This may not be a huge amount if you rarely trade but if you belong to the top brackets, it is quite likely to be a significant figure.

Tax on Long-term Capital Gains

People who have retained stocks for a minimum of one year and then sold them, need to pay the tax on capital gains derived from long-term trading activities. This is likely to be a lower figure as compared to the short-term capital gains tax and, therefore, many people with experience in stock trading will hold on to their stocks for longer.

Tax on Dividends

People who own stocks for which they receive a dividend need to pay a tax on this income they receive each year. If you have multiple such stocks, the tax will be calculated based on the sum of the dividends you received.

Stock trading may be a breeze once you get the hang of it; however, calculating the taxes you need to pay is not so simple. The price you paid for the stock, profits you earned and the brokerage commissions you spent on are important factors that affect your tax. Unless you provide correct information and pay the right amount of tax, you could invite penalties from the IRS that offset all the profits your stocks generated.

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