Michael Stock investors in this country enjoy surprisingly generous tax regulations. For example, on stock gains, the investor only pays the moderate Long Term Capital Gains Tax. Regardless of their income tax bracket, lucky stock market winners only pay a maximum of 15% if at least twelve months pass between the purchase and sale of a stock.
With this tax law, the state particularly favors the super-rich, who rake in billions in profits with this method and pay a ridiculous 15% in taxes. The billionaire and stock market expert Warren Buffet once claimed that his tax rate is lower than that of his secretary. The man deliberately keeps his salary low and derives the lion's share of his income from long-term capital gains on carefully selected stocks.
On the other hand, the state benefits from the long-term investments of the super-rich in stocks of American companies. The super-rich would have to pay insane tax rates on interest from mortgage bonds or savings deposits, which is why they prefer to pump their billions into the riskier stocks. Day traders, who realize speculative gains through short-term buying and selling, are a thorn in the side of the state. However, due to the twelve-month rule, they miss out and have to pay taxes on their gains at the normal income tax rate.
Another interesting rule applies to losses: The tax expert deducts these from existing stock gains and only pays taxes on what remains in the end. If your stock transactions result in an overall loss for the year, citizens are even allowed to deduct up to $3,000 from their other income. While this won't cover the losses, at least you don't have to pay income tax on the squandered amount, which can, as previously mentioned, be significant (Rundbrief 11/1999). Looking at the graph in the old issue, you can see that for high earners in California, income tax amounts to almost 50%. If the loss exceeds $3000, the taxpayer is allowed to carry forward the remaining amount to future, hopefully more successful years, but never more than $3000 per year.
But even here, the state protects itself from speculators. For example, someone who owns a plummeted stock, could sell it at a loss, deduct the loss, and then immediately buy it back to reap the profit if the price recovers shortly thereafter. However, the tax legislator ain't no fool, and they call a transaction where less than 30 days pass between the sale and repurchase of a stock a "wash sale," and prohibit the deduction of the loss.
This also applies in the event that the repurchase happens before the loss-incurring sale took place, because otherwise, one could easily circumvent the wash sale rule by buying a second batch of the stock cheaply, only to sell the first batch shortly after and claiming the loss. Here too, there must be at least 30 days between the two transactions; otherwise, the investor can't deduct the loss. If you sell stock at a profit, a "wash sale" doesn't matter because there's nothing to deduct. Tax programs like "Turbo Tax" are, of course, well-versed in applying the rule and correctly display any deductible amounts. But if you can rattle off the definition of the term "wash sale," you know more about American tax law than 99% of all Americans.