Why Investing and Taxes are a Big Deal

Nov 3, 2021 | Entrepreneur Blog |

3 Reasons Why Investing and Taxes are a Big Deal to Every Skilled Tradesman

Author: Nissa Fowler

You may have heard a little (or a lot) about BitCoin and cryptocurrency and you may have heard something about the time that Reddit caused a frenzy on GameStop stock.  Nowadays we can all have access to online investing, but how do we sort through the financial and tax implications of getting involved in this type of investing?  In my practice I saw more clients than ever attempting to reinvest in themselves by trading stocks in 2020. 

There were a lot of folks taking some of the profits from their business and attempting to multiply them by buying crypto or maybe a few shares of stocks.  Truly there are times when this could make a lot of sense.  Let’s discuss the possibilities.

It is important to make clear what we are talking about: the individual investment accounts that we are discussing here are different from your tax advantaged retirement accounts like an IRA or 401K.  These traditional retirement accounts have tax benefits (and drawbacks) that are different from the ones that apply to a brokerage account – sometimes called a “taxable” brokerage account.  Additional tax planning opportunities exist with the retirement plans that don’t necessarily exist when we are discussing the trend of people opening up a brokerage account or a cryptocurrency account outside of their retirement accounts.

The 2 reasons to be informed before jumping into investing like this are:

1)      Any income you receive from investment will affect your taxes!

2)      Selling an investment at a gain or a loss will affect your taxes!

3)      You didn’t realize this, but your ownership in something you bought in the stock market meant that you are now being issued a K-1 from a Publicly Traded Partnership – this will affect your taxes!

Interest earned and dividends received will be subject to taxation in the year you receive them as will the gain (or loss) on the sale of any investments.  This means that your AGI and your taxable income and so also your tax bracket will be affected by these investments.  Okay, so there are plenty on nuances about how, when and why these investing activities affect your taxes and it is especially complicated when we consider how the IRS is handling cryptocurrency transactions.

 So, you are asking, is it worth doing?  With the market soaring now higher than ever, certainly having a broad range of investments opens opportunities that you won’t want to miss if you happen to have some cash lying around.  It is tempting to want to get your piece of this pie!  That is a complicated decision to make, and I do not offer investing advice, but there are trusted professionals who do.

Making gains from stock (or gold or cryptocurrency) sales is generating money earned to you!  Paying taxes on that can be no fun at all if you are surprised by it or not planning well, but it really is no different than paying taxes on the income you are earning through your business!  While the taxes you will pay on investment activity are one topic, the real risk you need to consider when starting this is the risk that you aren’t making a good investment and you will end up with an overall loss instead of a gain.  Capital losses can offset capital gains, though, and this is why investing requires some devoted tax planning!

If you don’t already have a tax plan, then it is probably not a good time for you to jump into investing like this.  So, go ahead and get a tax plan in place and then you can use the dollars you are saving in taxes to play the stock market a little – if you have the approval of your tax planner!

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