Following the stock market and making your own investments can be financially rewarding and a lot of fun. The Internet enables anyone to easily buy and sells stocks, track stock movements in real time, chart past histories of a stock, use graphs to predict future price moves and to access a wealth of financial resources. Although opening a trading account with a brokerage does not directly affect your taxes, account activities dealing with earning interest, taking margin loans and buying or selling stock may result in tax consequences.
Opening a Trading Account
Before you can buy and sell stocks and options, you will have to open a trading account with a broker. You can visit a broker in a “brick and mortar” office or use the Internet to open an account with an online brokerage. To fund your account, you must send money to the broker, which will be used for you to purchase stocks, pay commissions and complete other transactions.
The money in your brokerage account sits idle while you research the companies in which you want to buy stock. When you sell a stock, the money from the sale will go into your account and be parked there until you use it to buy another stock or option contract. It’s common for brokerages to pay interest on the money that sits in accounts during these periods. Although the interest rate is low, it is often compounded daily and added to accounts monthly. At the end of the year, the brokerage will issue you a Form 1099 showing the interest you earned during the year. Report this on IRS Form 1040, Line 8a, “Taxable Interest.” If interest from this and your other income sources totals more than $1,500, you must also fill out and attach Schedule B.
Margin Interest Charges
If you are approved for a “margin account,” you will be allowed to buy stocks without having all the money necessary to do so. You must have at least 50 percent of the value of the purchase in cash in order to borrow the rest from your broker. The brokerage will charge you interest for the period of time you borrow the money, and the firm will use the stock as security. When reporting stock transactions on your income tax, this interest charge can be considered part of the cost of purchasing the stock, and can be subtracted from the profit you make when you eventually sell the stock.
When buying or selling a stock or option contract, a commission fee is charged. This money will be taken from your trading account. Subtract this fee from the money received from the sale to determine the net profit to report on your income tax. Use From 1040 Schedule D to list each stock transaction and calculate capital gains or losses for the year.