How taxation of stocks is done

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Your primary purpose of any investment, including putting your money in the capital market through trading with stocks is so that you can maximize of profits when you are ready to dispose them. This is therefore a channel through which you create some income for yourself and your family. As with any other kind of income, any income, in terms of profits made for investing in stocks is equally viable for taxation.

There are two ways in which you can pay tax for you stocks, that is if the stocks you own are not within tax-sheltered accounts for retirement like 401(k) s or the IRA.

If you make some profit after selling a stock in the capital market, then you are expected to pay taxes on the amount of money you have made from this sale. Basically, the difference between how much you bought the stock and how much you have sold it for and this is inclusive of any transaction commission costs.

The profit made from such an exchange is called capital gains and the tax charged on this profit is called capital gain tax. You do not pay any tax if you are within 10% and 15% tax range. Anyone else beyond this tax range pays 15%. You are expected to pay 20% either as an individual with above £400,000 or a couple with above £450,000 as taxable income.

The only exception to the rule is that you will pay your normal income tax rate on the short-term gain if you sell your stock in less than one year of holding it. For majority of investors, this amount is usually more than the capital gains tax.

In the event that you make a loss when you sell your stocks and the losses are more than any profit that you may have made, the difference will not be included in your tax return and will be used to lessen other income like earnings with a maximum of £3,000 for individuals or £1,500 for couples who are filling their returns separately. If you make losses that exceed the limit for that year, this loss can be carried into the next year and considered as a loss made in the following year and will be considered during your tax calculation for the next year.

Any dividend paid out will be charged as at the rate which capital gains are charged. Qualified dividends which include dividends paid from domestic or local corporations are usually taxed in this manner.

There is also the category of non-qualified dividends, which include those that are paid out from REITs, savings accounts or employee stock options that is usually at your normal income tax tariff.

There is also the option of paying an extra 3.8% tax rate which is a flat rate. This tax charge is also known as Medicare or net investment income tax on any investment you may have which exceeds £200,000 for an individual or £250,000 for married couples.

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