Short-term gains could lead to long-term pains. Planning for taxes on “meme stocks.”
- If you benefited from the meme stock frenzy, your tax liability could be at higher rates than you expect.
- Work with a tax advisor to understand if you need to make earlier tax payments now to avoid late penalties.
- Consider other planning strategies to help manage your tax impact.
Over the past few weeks, many people jumped in to trading during the volatility around GameStop, AMC and a number of other stocks. Perhaps you had already owned shares in these companies for a while and were able to sell near or at the recent high, or maybe you bought the stock as you read the news and sold quickly thereafter and make money.
While J.P. Morgan recommends investing for the long-term, we know that each person’s investment strategy is different.
But now that you’ve successfully exited your position, you need to prepare for your tax liability. Even if you still own your stock, you may still find this information useful as you consider a tax-efficient exit strategy. Consider the following:
- What is your tax rate? Selling appreciated stock can generate a capital gain. If you’ve owned the stock for more than a year, your gain is characterized as “long term” and is taxed at preferential rates. If you’ve owned the stock for a year or less, your gain will be short term and will be taxed at ordinary income tax rates, which are usually higher than long-term capital gains rates, so you need to prepare for a potentially higher tax liability than you may have expected.
- Do you need to pay taxes now? If you generate income or capital gains in a given year, you may need to pay some taxes on it throughout the year to avoid penalties for late payment, well in advance of the following April when you file your tax returns. This is known as making estimated payments, which is commonly done quarterly. It is important to work with a tax advisor to understand how much tax you need to pay in 2021 on the gains you recognized from the sale of your stock so that you aren’t hit with penalties, and how much you may be able to defer paying until April 2022.
- Consider the impact of deductions: In a year in which you generate more income than other years, your deductions may be even more important in order to manage your eventual income tax liability. If you’re philanthropic, perhaps a gift in 2021 above the standard deduction makes sense for you. If you are comfortable with debt, you may want to think about a loan whose interest may be deductible.
While the past few weeks have been exciting and you may have shared in the value generated by the volatility around GameStop and others, planning is key to make sure you maximize the amount of money you keep. Work with your J.P. Morgan Advisor and tax advisor to consider the options that are right for you. Your J.P. Morgan Advisor can run a goals-based analysis for you to illustrate the impact of these options and help you decide the best actions to take. And if you haven’t sold, before you do, reach out to your J.P. Morgan Advisor and tax advisor to consider the best way for you to sell your shares.
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