Did you YOLO on GameStop? Or maybe you went all in and struck out big. Either way, here’s what will happen with your taxes.
What is GameStock?
GameStock is the reddit.com/r/wallstreetbets rebellion against Wall Street. Members of the forum bought the stock GameStop after several hedge funds bet big that it would go down via short selling. Their goal was to inflate the price that the hedge funds would be required to close their short positions.
In a short sale, the trader borrows a stock at a certain price hoping that the stock will go down and they can buy it at a lower price to settle their loan. If the stock goes up instead, the trader has to buy at the higher price and will take a loss on the trade.
With GameStop, the traders borrowed more shares than existed. Redditors bought up shares knowing that the traders would have to buy regardless of price to close their positions. This allowed the redditors to profit through simple supply and demand.
How will people who made money on GameStop be taxed?
There are two sets of tax rates for stock trades. If you buy and sell within a year, you get taxed based on your ordinary income tax rates. Your gain or loss is short-term. If you hold for longer than a year before selling, you get taxed at lower capital gains tax rates. Your gain or loss is long-term.
GameStock began in the summer of 2020. Some traders cashed out early while others continued into January 2021. So just about everyone who bought GameStop is looking at a short-term trade subject to ordinary income tax rates because they held it for less than a year. You’d only have a long-term gain if you already had it in your portfolio before the GameStock craze.
If you made $1 million on a short-term GameStop trade, you’d pay a little under $370,000 in income taxes. Remember that the top tax bracket is 37% but you pay the lower tax rates for the portion of your income in the lower tax brackets.
If you were lucky enough to be holding for longer than a year, you’d owe $200,000 based on a 20% capital gains tax rate. If your income was lower, you might qualify for a 15% or even 0% capital gains tax rate.
Do you get a deduction if you lost money on GameStop?
When you lose money on a stock trade, you can deduct your capital loss. Your capital loss is simply the difference between what you bought and sold the stock for.
You can deduct up to $3,000 against your ordinary income. So if you lost at GameStock and couldn’t quit your day job, you basically just made your salary $3,000 smaller for tax purposes.
If you have gains from other stocks, you can offset the gains with your losses dollar for dollar. So a $10,000 gain and $10,000 loss cancel each other out and you won’t have to pay taxes on the gain.
If you have a loss that’s above the $3,000 limit and your capital gains, you can carry over the rest for future years. So if you lost $30,000, decide to never invest in stocks again, and never have a capital gain, you can deduct $3,000 against your salary for the next 10 years.