Cause I’m the Taxman
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“Cause I’m the Taxman” (The Beatles April 1966)
“Written by the group’s lead guitarist, George Harrison, with some lyrical assistance from John Lennon, it protests against the higher level of progressive tax imposed in the United Kingdom by the Labour government of Harold Wilson, which saw the Beatles paying over 90 per cent of their earnings to the Treasury.”
What does the Taxman have to do with investing ? Why everything of course.
The Taxman is right there to collect on your short-term trades, long term trades, option trades and more!
Yes, investing in meme stocks, trading options, collecting dividends on stocks and income from bonds all have a cost.
Taxing short term gains seems to be the one tiny detail newbie investors hot to make a killing in meme stocks forgot about. Totally forgot about.
So, while some are blustering and bragging about their huge gains, they are facing huge tax bills. Oops.
If you currently have a 401k account, IRA or other pension related account, those accounts are tax deferred. You don’t pay taxes on gains, income, or dividends until you begin withdrawing from the account.
One drawback of a tax deferred account like an employee sponsored retirement account, or 401k, is that the investment choices may be very limited.
You may not be able to buy individual stocks or use option strategies.
The rationale is that tax deferred accounts are retirement assets, not trading accounts, so restrictions are put in place to stop you from becoming leveraged or a short seller of meme stocks.
Many of the accounts opened today through the Robinhood platform and other brokerage firms are TAXABLE accounts.
The reason they are called taxable accounts, is because any gains you have from selling stocks, bonds, options, or ETF’s (just about anything) becomes taxable income in the year when the gains occurred. No deferrals.
As Reddit traders high fived and back slapped each other over all the money they were making, no red warning flag appeared saying “Hey buddy. Good for you ! Don’t spend it all “ ‘cause I’m the Taxman”.
Of course they spent it all.
How much could you end up owing?
It’s complicated, as are most things related to the IRS.
There is no single tax rate that is applicable. There are many different tax rates. Do you have short term gains or long-term gains.? Do you have income from stocks, bonds, mutual funds, or ETF’s? Different rates apply.
Tax rates for short term capital gains range from 10% to 37%. If you have $10,000.00 in short-term gains, depending on your income, you might be saying goodbye to $3,700.00.
Or hypothetically you made $100,000.00 in short term gains. The $100,000.00 plus your income pushes you into the highest tax bracket and now you are saying goodbye to $37,000.00 (before deductions and offsetting losses).
Did I say complicated? Tip of the iceberg.
I am not an accountant, and I am not an expert on taxes.
The last time I did my own taxes I was audited. I came out okay because I didn’t make any mistakes. But that was enough of a horrible experience to hire an accountant.
What I do know is that I need to have different investment strategies for my tax deferred accounts and my taxable accounts.
In my tax differed account, I tend to own more stock. I can take gains anytime without an immediate tax liability.
In my taxable account I tend to own more fixed income.
It’s a personal preference of course based on my personal risk profile.
Your profile will be different from mine.
What I do know, is that the Taxman waits for no one.
This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.
