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I've been planning to invest in stock to get started for the future, however, I'm concerned about taxes... if I was to get capital gains, and in a short time period reinvest it in another security, do I still have to pay tax?

I don't know much , but when I need to file (i'm not even sure if this is correct) taxes, how can they tax me on something I don't have anymore..aka it's reinvested into another security

Are there any other taxing complications that may arise? I currently live in a 4 person family

Edit: I live in CA, USA

Second Edit: I do not plan to hold the stocks for longer than a year for the most part

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    Lets start with telling us where you are from. Different countries have different laws, and when you're asking a question about laws - mentioning the jurisdiction is crucial to getting a proper answer. – littleadv Jan 27 '15 at 3:32
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    For what it's worth. Holding stock less than a year is more gambling than investing and generally not advised. – JohnFx Jan 27 '15 at 4:20
  • For some material evidence to what JohnFx said, see Barber and Odean 2000: "Trading is hazardous to your wealth." They studied 66,000 households and they found people who can't leave their money alone return wayyyy less than others. If you are going to shuffle things around at least once a year, all you are going to do is lose money on transaction fees. Add to that the fact that you're probably trading a small amount, you're only committing financial suicide. But on the other hand, if it is a small amount, that sounds like a great way to learn a lesson. My advice: put money in a 529 plan. – jmabs Jan 27 '15 at 5:59
  • @JohnFx - the length of time of holding an investment is not what makes it gambling, it is investing or trading without a plan that makes it gambling. If I bought a stock 10 years ago and my only plan was to sell it 10 years later (today) then I would be gambling. There is no guarantee the stock will be higher 10 years after I bought it, and there are many instances when it will be lower, especially if the 10 years later is during a market crash. – Victor Jan 27 '15 at 13:08
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    You may end up not paying any tax at all, because the vast majority of speculation by inexperienced traders ends in losses, not gains. – chili555 Jan 27 '15 at 17:11
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First of all, since you're 16 - you will not invest in anything. You cannot, you're a minor. You cannot enter contracts, and as such - you cannot transact in property.

Your bank accounts are all UGMA accounts. I.e.: your guardian (or someone else who's the trustee on the account) will be the one transacting, not you. You can ask them to do trades, but they don't have to. They must make decisions in your best interest, which trades may not necessarily be.

If however they decide to make trades, or earn interest, or make any other decision that results in gains - these are your gains, and you will be taxed on them.

The way taxes work is that you're taxed on income. You're free to do with it whatever you want, but you're taxed on it. So if you realized gains by selling stocks, and reinvested them - you had income (the gains) which you did with whatever you felt like (reinvested). The taxman doesn't care what you did with the gains, the taxman cares that you had them.

For losses it is a bit more complicated, and while you can deduct losses - there are limitations on how much you can deduct, and some losses cannot be deducted at all when realized (like wash sale losses or passive activity losses).

When you have stock transactions, you will probably need to file a tax return reporting the transactions and your gains/losses on them. You may end up not paying any tax at all, but since the broker is reporting the transactions - you should too, if only to avoid IRS asking why you didn't. This, again, should be done by your guardian, since you personally cannot legally sign documents.

You asked if your gains can affect your parents' taxes. Not exactly - your parents' taxes can affect you.

This is called "Kiddie Tax" (unofficially of course). You may want read about it and take it into account when discussing your investments with your guardian/parents. If kiddie tax provisions apply to you - your parents should probably discuss it with their tax adviser.

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    The Kiddie Tax basically means any unearned income over $2000 is taxed at the parents' rate, which is why Brian's answer was wrong. The child's earned income is a separate issue. – JTP - Apologise to Monica Jan 27 '15 at 4:42
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Don't try individual stocks. If you have a job, any job, even one from mowing lawns, you can open a Roth IRA. If you are under 18 you will need your parents/guardian to setting up the account. You can put the an amount equal to your earned income into the Roth IRA, up to the annual maximum of $5500.

There are advantages to a Roth IRA:

  • you are starting to save for retirement
  • Any earnings, whether capital gains or dividends, grow tax free.
  • If you wait until retirement you will be able to pull all this money out without any additional taxes.
  • If in a few years you need to get out what you invested to pay for college you can pull out your contributions without owing taxes or penalties. If you leave the earnings they will continue to grow.
  • The performance of your investment doesn't impact your parents taxes.

What happens if you are using your income to pay for your car, insurance, etc? You can get the money from your parents, grandparents. The only rule is that you can't invest more than you have earned.

Act before Tax day (April 15th). You know what you made last year. If you open the account and make the contribution before April 15th it can count for last year, as long as you are clear with the broker/bank when you make the deposit.

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    Keep in mind that you can only invest as much into an IRA (roth or otherwise) that you have taxable earnings in that year. So unless he has a job he can't contribute to an IRA. – David Rice Jan 27 '15 at 18:44
  • How does a Roth IRA affect paying for college? Will the earnings need to be reported and considered part of his ability to pay, even if they can't be withdrawn w/o penalties? – Joe Jan 27 '15 at 20:21

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