This year's tax filing season begins on January 24. Some new, younger investors may be in for a surprise.
"Last year was a really interesting year in terms of investors, especially younger investors," said Apex Fintech Solutions CEO Bill Capuzzi, "what they bought, when they sold, why they bought, why they sold."
Apex, the digital clearing platform for many investing apps, including SoFi and Stash, analyzes about one million trading accounts of investors ages 24 and younger each quarter.
For example, AMC was unranked before joining the list in sixth place on Apex's list of top 100 stock holdings for Gen Z investors in the first quarter last year. With the stock price's sharp rise and fall last January, AMC became one of the "meme stocks" of the moment. In the third quarter, AMC was the number one holding among younger investors. Yet as its share price tumbled from its year to date high, and the meme stock mania subsided, AMC finished the year in third place behind Tesla and Apple.
During this wild ride, Apex's analysis found most younger investors weren't day trading in and out of AMC and other "meme stocks," Capuzzi said. "In most cases it was a 'buy and hold' [strategy]," he added. "In some cases, they actually added to the position, really smart as this thing was climbing, and then in some cases, some folks took profits."
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New investors who took profits in AMC and other "meme stocks" will soon get a close look at the tax treatment on their investments, and should keep this in mind as they file their 2021 returns, tax experts say.
"Gains from investments held for one year or less before being sold are considered short-term capital gains, and are subject to ordinary income tax rates," said Jeffrey Levine, chief planning officer at Buckingham Wealth Partners.
Long-term gains from the sale of securities held more than one year will be taxed at either 0%, 15%, or 20%.
And, investors with more losing stocks than winners may deduct up to $3,000 against their regular income. If your net capital loss is more than this limit, you can carry the loss forward to later years.
For investors who still have a net capital gain, Betterment's head of tax Eric Bronnenkant says that money is considered income. An increase in income could reduce certain tax breaks, he said, such as student loan interest deductions, child tax credits, and deductions for medical expenses.
"These things are all tied to your adjusted gross income, and the higher your adjusted gross income goes typically, the less tax benefits that you're going to qualify for," he said.
And, if your income increases significantly, you may no longer be able to contribute directly to a Roth IRA, tax experts say.
You have until the tax filing deadline on April 18 to make a Roth IRA contribution — up to $6,000, or $7,000 if you're 50 or older — and have it count for the 2021 tax year. To make a Roth IRA contribution for 2021, your income must be under $140,000 if you're single and less than $208,000 if you're married filing jointly.
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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.