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I'm curious to how my taxes work when I am trading with my own personal stock account at E*trade.

Suppose I buy XYZ stock at $100 and it goes to $1,100. My profit is $1,000. I read that the $1,000 profit is a "short term gain" and there is a fee of 50%. After the fee, I have a $500 profit.

Do I get taxed again on that $500 on my 1040 at my current tax rate? Or is the 50% that they took away a one time tax? What is long term rate?

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    A few of 50%? I’ve only ever heard of short term capital gains being taxed as normal income. – RonJohn May 19 at 1:36
  • Are you a US Citizen (therefore required to pay US income taxes despite living overseas) or are you a citizen of a different country and also not a US resident for tax puproses? – The Photon May 19 at 2:09
  • Note: OP's profile lists Tokyo in the free-form field and New York City in the location. – Ben Voigt May 19 at 2:16
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Say I bought XYZ stock at 100 and it went to 1100. My profit is $1000. I read that the $1000 profit is seen as a "short term gain"

There is no taxable gain just because the stock price increased. You have to actually sell the stock at a higher price than you paid for there to be a taxable event.

and there is a fee of 50%. Now my earnings is $500 profit.

This would be very odd. There may be circumstances where a broker is required to withhold taxes from a sale, but they are at least very uncommon.

Being a non-US-citizen and non-resident may be one of those circumstances, according to Schwab. If that situation applies to you, you should mention it in your question.

Do I get taxed again on that $500 on my 1040 at my current tax rate? Or does the 50% they take away is the 1 time tax?

If you sold the stock at $1100, you would be taxed on the $1000 profit.

If your broker withheld taxes on the sale, you would get a credit for that withholding and it would reduce the tax due when submitting your return.

So the net effect is you pay taxes only once on the $1000 profit.

What is long term rate?

Your capital gains will be taxed at the long term rate if you hold the stock for at least 1 year before selling.

The long term rate depends on your total income. It can change each year depending on legislation passed by congress.

Current rates and the rules for applying them are documented at irs.gov.

  • It's a $1,000 profit not a $100 profit. Fix the math? – Bob Baerker May 19 at 2:46
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    @BobBaerker, Oops. But if OP is making $1000 profit on $100 investments I they should be publishing a newsletter instead of asking questions here. – The Photon May 19 at 2:51
  • LOL, Yep, you and me both. – Bob Baerker May 19 at 2:53
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I’m not sure where your idea of a 50% fee or tax comes from, but there is no such thing.

Short term capital gains are included in your taxable income and are taxed at the same rates as wages.

Long term capital gains are taxed at 0%, 15%, or 20%, depending on your AGI. If you want more details on how long term gains are taxed, perhaps you should ask another question.

  • Unearned income is not taxed at the same rate as wages, it's lower by 7.65% (Social Security and Medicare tax that applies to wages and not investment income) – Ben Voigt May 19 at 2:10
  • @Ben, sure, but this is just referring to income taxes (which capital gains is a part of, but Social Security and Medicare taxes are not). – prl May 19 at 2:34
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    But I did oversimplify, because I didn’t mention the Net Investment Income Tax, which does apply to short and long term gains. – prl May 19 at 2:35
  • @prl Let's get picky. If you mean the 3.8% tax on net investment income, that is (1) zero if your Modified Adjusted Gross Income (MAGI) is less than 200,000 (single filer), or (2) if your MAGI is over 200,000, the lesser of your net investment income or your MAGI exceeding $200,000. MAGI Threshhold for married filing jointly is 250,000. And there are a bunch of exemptions to investment income, notably retirement plans. MAGI is the same as AGI for most people. +1 for your answer; where the idea of the 50% fee came from is a mystery. – ab2 May 19 at 4:09
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What's got you confused is the "50% fee", you are thinking this is some sort of tax, and then you pay tax. No. This is a concept called withholding.

Imagine a world with no withholding. Say your wage is $52,000/year. Every week you get your paycheck and it's all your pay, no withholding, so it's $1000. Then, at the end of the year, you do your taxes. Your tax is $5200. So you have to write a check for $5200. Yeah, right, who has that kind of money laying around? I spend it all every check!

So they withhold money for taxes every paycheck, and put that into a your account where it's reserved for paying taxes. It is your money, but it is held/reserved to pay your future tax bill. At the end of the year, you file your taxes. Figure out what your total tax was for the year (say $4000). Then, you apply the withheld tax amount to that number (say $5200). The first $4000 of that pays your taxes, and the other $1200, you get it back! That is called a tax refund.

So in your case, the "50%" is withholding. They are withholding at a high rate for reasons I don't know.

You need to file a USA Form 1040 or 1040-NR taxes. When you do that, you will list this amount under "Tax Withheld", which counts it as a tax payment. If too much was withheld, you would get a refund.

  • I got the 50% from gambling at a casino. As I heard that you need to pay 50% of earnings if you win at a casino. Which is not the same as stocks short term trading? – Patoshi パトシ May 20 at 15:40
  • Well that's not what you said in your question. However that would explain the 50%, as IRS docs say nothing about backup withholding at a 50% level, which is awfully high. Perhaps you paid this "tax" to the local mafia. That's not real tax and has nothing to do with the IRS. The IRS will tax you (once). – Harper May 20 at 15:59
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There is double taxation, but nowhere near as much as you suggest.

Let's make a more realistic example, because "short term gain" implies the time period is less than one year, and a factor of 11 in under a year is not reasonable.

Say you spend $200 to buy a stock with a PE ratio of 18, and hold it for 6 months. The earnings were formerly 200*0.5/18 = $5.56, but the company had a breakout year and tripled their earnings. This resulted in increased market interest and the PE ratio doubled. So you receive $15 in dividends, and sell for $1200, a short-term capital gain of $1000. (This is still fantastically better than anyone expects)

The $15 in dividends comes from earnings, which are calculated after the company has already paid corporate tax.

That $15 and the $1000 capital gain will be added to your unearned income. You will list them on your 1040 and pay federal, state, and local income tax at your marginal rate (but not payroll tax aka FICA aka Social Security and Medicare, since these only apply to earned income).

The double taxation only applies to the $15 dividend, on which the company paid corporate tax and you paid personal tax. The $1000 increase in valuation wasn't corporate income, only your personal unearned income.

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    This is like asking what time it is and being told how to build a clock :->) – Bob Baerker May 19 at 2:54
  • "The $1000 increase in valuation wasn't corporate income, only your personal unearned income." It's the expected value of future corporate net income. Thus, it is reduced by taxes. – Acccumulation May 19 at 3:27
  • @Acccumulation: That's a good point, but it hasn't actually been taxed a second time. There are a whole lot of forward-looking estimates baked into the stock price. – Ben Voigt May 19 at 4:31
  • @BobBaerker: I was trying to get to an explanation of the one place that double-taxation does occur, which is that the distribution has been taxed at both the corporate and individual investor levels. – Ben Voigt May 19 at 4:34

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