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Taxes

These tax forms are essential if you actively trade stocks

If you actively trade stocks filing your taxes can quickly become a big headache.

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Source: Getty Images

2021 quickly became the year of meme stocks and investing with platforms like Robinhood as Americans looked for ways to make money during the pandemic. Now, investors may be surprised at the flood of tax documents they received for last year's trades.

While filing taxes is never an enjoyable process, it's a necessary part of investing. Whether you made significant gains, or took advantage of losses with tax-loss harvesting, you must file taxes with information about your trades.

Select details what forms you need to be on the look out for and how to file your taxes as a trader.

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Tax forms you need as a stock trader

Whether you only made a few trades or you actively traded your way through the pandemic, you'll receive tax documents from your investing platform. These forms indicate your gains and losses to the IRS.

By law, trading platforms are required to mail these documents to you. However, many platforms upload the documents into your profile so you can download them at your convenience.

Eric Bronnenkant, Head of Tax at Betterment, told Select which forms traders need to include in their tax return: "Active stock traders should be on the lookout for a 1099-B and 1099-DIV. The 1099-B is for investment sales/cost basis and also reflects any wash sale violations in that account. The 1099-DIV is for dividends and capital gain distributions."

Keep in mind that if you have more than one brokerage account, you're required to collect those documents for each account. And Bronnenkant urges consumers that if you have wash sales across different accounts, including your spouse's, those need to be reported as well.

Quick ways to legally reduce your taxes

If you've made a significant amount of money in stock trading, there are simple ways to earn tax write-offs to reduce your taxable income. However, all of these strategies need to be completed during the same tax year, so it's unfortunately too late to reduce your 2021 taxable income.

But from this year and on, you may consider using one or more of these strategies to avoid paying more taxes:

Contribute to a tax-advantaged retirement account

Retirement accounts like a 401k or IRA from Vanguard or Wealthfront can give you pre-tax benefits to lower your taxable income for the year. For example, the 2022 401k contribution limit is $20,500, so if you were to max this out, you can reduce your total taxable income by over $20,000. And what's more is those funds can grow through compound interest until you retire. That $20,500 invested for 30 years at a 8% rate of return will grow to over $206,000, and you'll only owe taxes once you take distributions from your account.

Vanguard

  • Fees/commissions

    $0 

  • Account minimum

    $0

  • Investment options

    Stocks, bonds, ETFs, mutual funds, options, CDs

Pros

  • Excellent customer service
  • One of the largest ETF and mutual funds offerings around
  • Large number of no-transaction-fee mutual funds

Cons

  • $20 annual fee for IRAs and brokerage accounts, though investors can waive this fee by opting into paperless statements
  • Basic trading platform only
  • No robust research and data tools

Wealthfront

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance

  • Bonus

    Get $50 bonus when you fund your first taxable investment account

  • Investment vehicles

  • Investment options

    Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks

  • Educational resources

    Offers free financial advice for college planning, retirement and homebuying

Terms apply.

Pros

  • No trade or transfer fees
  • Good for automated investing
  • Picks investments based on user's risk tolerance and time until retirement
  • Offers a cash management checking account with a debit card
  • Tax-loss harvesting to reduce the taxes you pay: 
  • Fund your first taxable Investment Account and get a $50 bonus.

Cons

  • $500 minimum deposit
  • 0.25% management fee

Contribute to a Health Savings Account (HSA)

An HSA is known to many investors as having a triple-tax advantage, making it an extremely valuable investment vehicle. While the account is designed for Americans with a high-deductible health plan (HDHP) to save for medical expenses, it's a solid way to build your net worth and retirement nest-egg.

If your employer offers one, you can get three tax breaks. First, money from your paycheck goes into the account tax free (therefore reducing your taxable income). The funds in the account can be invested into a brokerage account and will grow tax free as long you wait to withdraw them until age 65. And if you use the money for qualified medical expenses, withdrawals will be tax free. However, if the funds after 65 are used for non-qualified medical expenses, they'll be subject to ordinary income tax.

If your employer doesn't offer an HSA, you'll have to put post-tax dollars into your account, but you'll receive a tax write-off to lower your taxable income for the year.

Sell your losing stocks

It's likely that you've made at least a few trades where you've lost money on your investments. While it may have stung to been wrong on a stock, there's fortunately a way to make a bad situation a bit better.

By selling a stock for less than you bought it, you can use the strategy of tax-loss harvesting to your advantage. For example, if you bought a stock for $500 and then sold it for $300, you can take the $200 loss and reduce your taxable income for the year. With this strategy, you can reduce your income up to $3,000 per year. However, to qualify for this tax break, you can't sell a stock and buy back into the same one within a 30 day period. This is considered a wash sale.

Best tax software

Regardless of your investing strategy, taxes will always play a part in it. And filing taxes can become a burden if you're an active stock trader. If you find yourself overwhelmed with tax documents, a tax software service could make preparing your tax return a whole lot simpler.

Some of our favorites are H&R Block, TaxAct and TurboTax. Some of these tax services can sync with your brokerage account to automatically import information on your trades so you don't have to manually enter in every transaction.

H&R Block

On H&R Block's secure site
  • Cost

    Costs may vary depending on the plan selected (Free Online, Deluxe, Premium, or Self-Employed) - click "Learn More" for details

  • Free version

    Yes (for simple returns only)

  • Mobile app

    Yes

  • Live support

    Available with some pricing and filing options

Terms apply.

Pros

  • Simple step-by-step guidance that's easy to follow
  • Unlimited on-demand chat or video support with Online Assist plans
  • Ability to speak to a tax expert who has an average of 10 years experience (for paid plans only)
  • Over 11,000 physical locations so you can meet with a tax expert in-person
  • Maximum refund guarantee, or H&R Block will refund the plan fees you paid
  • Audit support guarantee, which provides free assistance if you get an IRS or other tax notice
  • 100% accuracy, or H&R Block will reimburse you for any penalties or interest up to $10,000

Cons

  • Must have a paid plan to speak with a live tax expert
  • One of the more costly software programs

TaxAct

On TaxAct's secure site
  • Cost

    Costs may vary depending on the plan selected - click "Learn More" for details

  • Free version

    Yes

  • Mobile app

    No, the mobile app was discontinued

  • Tax expert support

    Yes, costs extra

Terms apply.

Pros

  • Up to $100,000 accuracy guarantee, which reimburses you for IRS/state penalty or interest if the TaxAct software causes a calculation error in your return
  • More affordable than other paid software
  • Free one-on-one support from real tax experts with all plans
  • Maximum refund and 100% accuracy guarantee, or TaxAct will refund the plan fees you paid and pay any difference in the refund or tax liability, plus cover any legal or audit costs up to $100,000

Cons

  • Free plan charges per state return

TurboTax

On TurboTax's secure site
  • Cost

    Costs may vary depending on the plan selected - click "Learn More" for details

  • Free version

    TurboTax Free Edition. ~37% of taxpayers qualify. Form 1040 + limited credits only.

  • Mobile app

    Yes

  • Live support

    Available with some pricing and filing options

Click here for TurboTax offer details and disclosures. Terms apply.

Pros

  • Step-by-step guidance with a Q&A format that is easy to follow
  • TurboTax Live provides on-demand advice and a final review from a tax expert
  • Live Full Service has a tax expert prepare, sign, and file your return
  • Audit support, which provides free assistance if you get an IRS or other tax notice

Cons

  • More costly than other software programs
  • Live expert assistance plans have additional costs

Bottom line

Trading stocks can be a lucrative, but it can also cause a headache when filing your taxes. So if you're buying and selling stocks on a regular basis, it's important to also create a tax strategy that works for you.

Additionally, be sure to only trade stocks with money you can afford to lose. This means you'll want to have your basic financial bases covered, including having a fully funded emergency fund, contributing to a retirement account and no high-interest debt.

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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