I'm guilty. I got emotional. I had a 100 shares and decided to sell a call option against my shares.
Now I'm concerned about my taxes if the shares get sold. To be clear, I want to hold shares in this company for a long time (10+ years).
As of now, I have no job because I went back to school. Therefore my only income comes from my investments. I'm planning to only sell this 1 position this year. The net profit would be just below $39,000 (by sheer luck!). All of these shares have been held longer than 1 year.
Then let's say, I buy 100 shares at the same price because I still want to hold them long term.
Does this mean I will pay Zero taxes for my 2021 tax return AND reduce the tax paid when they're sold for a profit in the future?
Is there anything I'm missing or need to watch out for if I plan to sell for a profit & buy them back right away? I'm new to taxes but from googling around, it sounds like this is the best option to reduce my tax.
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If you sell for a gain, you will incur a taxable gain; however, if your only income is a $39,000 capital gain, you will not owe any federal income tax. Depending on what state you live in, you might owe state tax on the gain. Wash sales do not apply to gains, so you can turn around and buy the stock back with no negative repercussions.
If you sell for a gain, you will incur a taxable gain; however, if your only income is a $39,000 capital gain, you will not owe any federal income tax. Depending on what state you live in, you might owe state tax on the gain. Wash sales do not apply to gains, so you can turn around and buy the stock back with no negative repercussions.
When you have no other income that is the best time to take capital gains.
Sell the stock and immediately repurchase it.
You will be starting fresh with a new much higher basis.
Caution: if your account is not enabled for naked options, you may not be able to sell that stock with a short call outstanding. Contact your broker to see if the same day sell/buy will be allowed.
Caution # 2:
The favorable treatment only works if you held the stock for more than a year.
If you don't have that holding period, you need to close out that call option even if it is at a loss.
OR roll it out to a longer period but you would still be at risk of early assignment.
Thank you very much for the helpful Cautions, @fanfare ! Yes, I've owned the 100 shares for 3 years so I'm good on that front.
Are the capital gains taxes also progressive? And if so, what tax rates take precedence? The long term rate or regular tax bracket rate get calculated first?
For example, suppose I make $5,000 this year from a short-term capital gain. And I have $38,000 from a long term gain. No other income in this example. And let's use the 2020 thresholds
Am I correct in saying that I would first pay 10% on the $5000 = $500 (because it counts as regular income).
Then I would pay 0% on $33,000 + 15% on $3000 = $450 (because 3000 of the 38,000 was bumped above the 40,000 threshold for 0% long term cap gains tax rate)
Thus, a total tax bill of $950 in this example?
If you want the scoop on this you need to review the Qualified Dividends and Capital Gain Tax Worksheet QDCGTW in the IRS instructions documents.
If you figure it out, reply back. I gave up trying a long time ago.
The important thing is that the Bush Tax Cuts For The Rich put you in this favorable position.
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