Tax Tip for Smart Investors

Photo by Clay Banks on Unsplash

I’ve seen lots of new investors make a killing on stocks and crypto over the last year. One common problem I’ve noticed: capital gain taxes are often overlooked!

Here’s a quick primer to help other smart investors calculate intra-year capital gains.

It’s important to know how much cap gains you owe so that you can strategize trades to minimize your tax obligation. You can either have an accountant on retainer, who gives you this information everyday, or do this manually using a spreadsheet. Here’s how to do it manually:

1. Go through your trades and organize them by short term or long term (ST < 1 year and LT > 1 year).
2. Then, calculate your net ST and LT gains independently, as they are taxed differently.
3. Now, comes the tricky part. Find any trades that violate wash sale and set those losses aside. Wash sales occur most often when you rebuy the same stock or option within 30 days of booking a loss. The WS loss gets added to the buy the triggered the WS, increasing the cost basis. Still a bit confused on wash sales? Here’s a quick primer: https://www.investopedia.com/terms/w/washsalerule.asp
4. If you made it this far, congrats! You’re almost halfway there!
5. Using schedule D in your 2020 tax return, find if you have any carry over losses. Look for lines 6 and 14. You can only deduct up to $3000 a year so if you used that full amount in 2020, then you have no carry over for 2021. Subtract ST and LT carry over losses respectively.
6. To review, net ST = ST gains — ST loss (excluding wash sale losses) — 2020 ST carry over losses. Calculate the same way for LT. Also, if you have a net ST loss and a net LT gain, now’s the time to sum the two together. So -$100 ST + $300 LT = $200 LT.
7. Now, here’s something easy for you. Find your ST and LT tax brackets using your filing status and your estimated 2021 income. Here are the brackets for 2021: https://taxfoundation.org/publications/federal-tax-rates-and-tax-brackets/
8. Here’s the last hurdle, calculating estimated taxes. Find your base ST tax % and subtract the upper limit $ of that bracket by your 2021 income to assess the total cap gains that can be taxed at that rate. Multiply this amount by your base ST tax %. So for example, if you’re single and you’ll make $80,000 in 2021, then your base ST tax % is 22%, and you can multiply up to $6,376 ($86,376 — $80,000) in ST gains at 22%.
9. If you still haven’t taxed all of your ST cap gains, then multiply the remaining gains by the next tax bracket % (assuming the next bracket is big enough to hold all remaining gains). Continuing the previous example, if you’ve got $50,000 in ST games, then your first $6,376 is taxed at 22% and the remaining $43,624 will be taxed at 24%.
10. Sum up all cap gains taxed at the marginal tax rates and repeat steps 7–9 for LT gains.
11. Simply add your ST and LT taxes to arrive at your estimated 2021 cap gains tax obligation!
12. Finally, remember that this calculation is a very simple way to boil down a complex calculation. There are lots of nuances not mentioned here. Also poke holes in my logic if you have an easier way!
13. If all of this sounds complicated and painful, try out an automated calculator at getreconcile.com for free! We’ve built the first automated tax solution for your capital gains. I’ll even onboard you myself!

Hope this was a helpful thread for many new and experienced investors! Just trying to help others avoid the same mistakes I did!

Jaimin Desai (CEO)