Did Reddit just win the Super Bowl? (Taxes)

The educational portion of this newsletter focuses on taxes

Really though, does anyone actually like Valentine’s day? We think that instead of giving flowers and chocolate to show that you love someone, instead consider opening up an investment account for them. Hear us out.

  1. Flowers die
  2. Even the most basic “robos” outpace inflation (so it’s better than giving money)
  3. Investing can set someone up for a lifetime
  4. You can invest in commodities (like gold), which is edgier than giving jewelry

And if you choose a hands-free investing platform like Q.ai, neither of you will ever have to deal with managing your investments yourself. You can thank us later.

This week’s biggest headlines

  • Bumble stock skyrockets to after going public on the Nasdaq. We’re all about historic first and this one is no exception. Whitney Wolfe Herd, Bumble’s CEO, made history on Thursday as the youngest female founder to bring her company public in the U.S. at the age of 31. Match, the parent company for most of its biggest competitors like Tinder and Hinge, has a market cap of $45.5 billion. As of yesterday’s closing, Bumble has reached a market cap of $7.7 billion. Read more.
  • Shell is lowering its oil production every year as it transitions from fossil fuels. The company shared that it had hit its peak in carbon emissions in 2018 and has, like many other legacy oil giants, pivoted to clean energy. Read more.
  • Tesla bought $1.5 billion worth of Bitcoin and will now start accepting payments of the digital currency. Could this be why Musk has been behind the pro-Bitcoin tweets that may have inadvertently driven the value up by almost 20%? Is it illegal to say you love Bitcoin? No. But it might be against the rules to not disclose the company’s massive purchase. Alas, that’s for the SEC to decide. This is not to be confused with his recent activity with Dogecoin, the other crypto he’s partially responsible for driving its worth to a total of $10 million this week through the use of memes. Read more.
  • Cannabis stocks collectively nosedived yesterday. The massive selloff put an end to a widespread rally caused by enough people getting excited over the possibility of federal marijuana legalization. Of course, people are saying that WallStreetBets had something to do with it. It’s possible. On the flipside, it’s not unusual for certain stocks to surge purely based on speculation. We saw some of that last year with travel and hospitality stocks when news broke about the vaccine receiving FDA approval. Those same stocks fell days later when it became clear that not everyone would get a vaccine right away. If you didn’t already sell by now, you’re better off holding until shares reach an area of resistance (the opposite of where it’s at currently). Read more.

Cannabis stocks leading up to yesterday’s selloff

  • Disney+ edges towards 100 million subscribers. Remember when Disney said it hopes to hit 60 million subscribers – and then revised the number to 90 million – by 2024? Combined with Hulu and ESPN+, Disney now has almost 150 million subscribers across all of its streaming platforms. As a reminder, Netflix has a little over 200 million subscribers. Considering the massive 12-year headstart Netflix had, these numbers are wild. Read more.
  • Reddit doubles down on WallStreetBets support – and in valuation. A new $250 million funding round has fared well for the front page of the internet. Two years ago, Reddit was valued at $3 billion. Now, it’s valuation is $6 billion. And if you’re confused about whether Reddit co-founder Alexis Ohanian and CEO Steve Huffman support the now-infamous subreddit, their 5-second Super Bowl ad should clear things up. We’d post the video, but what you really want to see is this. Read more.

How taxes work for investors

TL;DR

When you delve into the world of investing, knowing the tax implications is essential to maximizing your gains. Each of our four common sources of investment income come with its own rules regarding tax liabilities:

  • Interest is usually taxed at your current income bracket
  • Qualified dividends are taxed at 0%, 15%, or 20% depending on your filing status and income; whereas nonqualified dividends are taxed at your current income bracket
  • Capital gains held less than one year are taxed at your current income bracket; whereas capital gains held more than one year are taxed at 0%, 15%, or 20%, depending on your filing status and income
  • Qualified withdrawals from your traditional retirement accounts are taxed at your income bracket at the time of withdrawal; whereas Roth retirement accounts are taxed at your current income bracket upon contribution

Nothing good in this world comes free. Unfortunately for successful investors, that includes income and capital gains off their investments. Once you pass a certain income threshold, Uncle Sam – as always – wants his share.

While you can find all this stuff on the IRS’s website, we’re going to break down the most important things you should know about investment taxes.

Types of investment taxes

The first thing to know about taxes as an investor is that your tax rates will vary with your situation. At the end of the day, it all boils down to income – you’re paying Uncle Sam from your investing profits.

But how much – and when – you pay depends on the investments that generate said profits.

To that end, we’re going to focus on four common sources of investment income:

  • Interest
  • Dividends
  • Capital gains
  • Retirement accounts

Of course, these aren’t the only sources of income in the investing world. But, for the sake of learning the basics, this will provide a solid foundation on which to build a more complex understanding in the future.

Taxes on Interest

In most cases, the federal government treats interest on investments as if it were ordinary income. This means that you pay the same marginal tax rate on both your work and investment earnings in a given year. 

The United States does grant a federal tax exemption in some cases, however. One such instance regards state- and municipal-issued bonds, which often don’t come with a federal tax bill. Many states also offer exceptions for various government bonds, while other securities – such as U.S. Treasuries – are always exempt from state income taxes. 

Sometimes, though, bonds can come back to bite investors in the rear – such is the case with zero-coupon bonds. While investors don’t receive a payout until the bond matures, they’re required to pay taxes on annual interest calculated at the yield to maturity on the issuing date.

Taxes on dividends

Dividends are payments companies make to shareholders out of their after-tax profits. Taxes on these payments can be more complex than interest-related situations, depending on the company’s status with the IRS.

Generally, you’re required to pay taxes on dividends the year that they’re received – even if you reinvest them in your portfolio. But how much you pay depends on if you’re invested in companies that pay qualified and nonqualified dividends. 

  • Qualified dividends come from U.S.-based companies, as well as entities that have double-taxation treaties in the United States (pursuant to IRS approval)
  • Because these companies pay out dividends after taxes, shareholders get a small break come tax season
  • As a result, qualified dividends are taxed at a maximum preferential rate of 20%, although those in lower income brackets may pay 0% or 15%

It’s important to note that there are qualifiers for receiving the preferential rate.

  • A shareholder must hold their position for 61 of 121 days starting 60 days before the ex-dividend date
  • If a shareholder reduces their risk via options or stock shorting, those days do not count toward the minimum holding period

On the other hand, non-qualified dividends come from companies based outside the United States. Some U.S.-based entities may also generate non-qualified income, which will negate any preferential tax treatment.

Taxes on capital gains

Capital gains are the profits that result from selling your assets

  • These may include stocks and other securities, real estate, or even your business
  • In most cases, these sales generate “taxable income” according to the IRS.
  • Capital gains taxes can be complex in that the rates differ based on your holding period, rather than just your income

Short-term capital gains: gains realized on sales 1 year or less from the purchase date – receive the same tax treatment as your regular income. In most cases, this tax bracket will be higher than the long-term brackets.

Long-term capital gains: gains realized on sales more than 1 year from the purchase date – are taxed at 0%, 15%, or 20%. The rate you pay depends on your total taxable income and filing status for the given year.

It’s important to note that for both long- and short-term investments, the rule for holding periods is the same as with dividends. If an investor reduces their risk of loss with options or short sales, those days do not count toward the minimum holding requirement.

Taxes on Retirement Accounts

Retirement accounts differ in their tax treatment to encourage individuals to save for the future. These tax-advantaged accounts allow you to invest so that you minimize your tax burden while maximizing future gains.

There are two main types of retirement accounts: 401(k)s and IRAs. While each has its own subsets with different rules and financial implications, we’re going to focus on the “traditional” and “Roth” versions.

  • Traditional 401(k)s and IRAs are tax-deferred accounts, which means you don’t pay taxes on contributions
  • You also don’t have to pay taxes on gains, interest, or dividends, so long as the money remains in the account

But tax-deferred means that, eventually, you’ll have to pay Uncle Sam his share. 

  • When you make qualified withdrawals – typically meaning you are age 59½ or older – the money counts as regular income for that year
  • Thus, you’ll pay taxes in line with your current income tax bracket
  • However, if you take early (or even late) withdrawals, you’ll incur additional penalties

On the other hand, Roth 401(k) and IRA contributions are not tax-deductible – so be prepared to pay taxes on the money you invest

  • The tax rate on these payments falls at your current income tax bracket. But, unlike traditional accounts, you won’t have to pay taxes when you make qualified withdrawals
  • This is what makes Roth accounts valuable to investors (as long as your income is within eligibility parameters)

The bottom line

Don’t let all of this tax talk intimidate you from investing. We all have to pay taxes already, so think of this as an additional step in your checklist of things to do. If you feel like this is too much to deal with on your own, you can always consult someone to file your taxes for you. And there’s plenty of do-it-yourself platforms that will still cost you money, but will be significantly less than outsourcing the task altogether. 

As you go into the next tax year (as a top-notch investor, of course!), keep these tips in mind. It is all intended to help you minimize your tax burden.