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  1. Taxes
  2. Capital Gains Tax

Investors Who Made Money Trading Stocks or Bitcoin Are About to Be Hit With Capital Gains Taxes

Published: Feb 09, 2021 9 min read

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Guide explorer in head of uncle Sam
Kiersten Essenpreis for Money

The stock-market has been on a tear, hitting a string of record highs. One downside: Millions of investors who realized big gains trading stocks (or bonds or even bitcoins) may soon owe Uncle Sam a hefty tax bill.

While investments aren’t always taxed as heavily as income, depending on where you live, how much you earn, and how long you hold the investment, you may be on the hook for 30% or more of your profits.

Plenty of investors seem to not fully understand the nuances. The IRS has recently taken several steps to make sure traders of Bitcoin and other cryptocurrencies pay what they owe. And many observers have warned that novices, drawn to rapid-fire trading platforms like Robinhood, may be in for unpleasant surprises when they file their 2020 tax return.

While you can’t avoid taxes, anyone who trades stocks, bonds or any other type of investment needs to know the basics of how they work:

How are stock trades taxed?

Profits you earn from trading stocks are taxed by the federal government and, depending on where you live, also by your state.

Trading profits are considered capital gains, as opposed to income. That means they may be taxed a lower rate than your salary, if you held the stocks (or other assets, like bonds or cryptocurrency) for more than a year. This is also true of qualified dividends.

On the other hand, short-term trading profits (on assets held less than one year) are taxed like income.