COVID-19 and Stock Market: How will it affect next year taxation?

The pandemic COVID-19 has created great havoc in the physical and economic lives of people across the world. In the US, COVID-19 has not only affected the lives of people but also has created a huge amount of economic disruption. Several businesses have been closed temporarily whereas many small businesses might not even be able to open anymore. Many employees are losing their jobs and the overall economy is being affected.

The impact of the pandemic has also been experienced in the global stock markets by recent slides and low values. In the current times, we are in the middle of a pandemic and we have never been prepared for this by the financial markets or by the investment books. 

In such tough times, we must be prepared by taking some precautionary steps.

1. You must check your investment portfolio thoroughly and understand in detail about the stocks in which you have made the investments. You should also understand how investments have been done in these stocks so that you would be ready.
2. A risk assessment must be done to understand the major risk areas of investment and steps to deal with them.
3. Investments must be arranged in different kitties so that recovery can also be easy and quick.

However, even during these grim times when the stock market rates are falling steeply, some hand-picked options would help in keeping your finances stable for next year’s taxes.

a.Capital Gains

In simple terms, capital gains are the profits that are earned due to the sale of a capital asset such as a stock, bond or real estate. It is when you are selling an investment such as a stock for an amount which is more than you have paid to purchase it.

Capital Gains are taxed and this taxation depends upon your income. The maximum percentage for taxation of the Capital Gains can be around 20% of your income which can add up to be a huge amount on your tax bill. So, if you are having a loss in your investment you can it can be helpful in reducing your tax bill of Capital Gains. This can help you in keeping an additional amount of money with yourself when the stock markets are down. 

b.Loss realization for Capital gains in 2020

Throughout the world, investment owners are experiencing the value of the majority of their investments going down. When fluctuations occur on the Stock board they are known to be paper gains or paper losses. It means that you were just having an observation of the market without taking any action to sell your stocks/bonds.

However, it is quite obvious that market fluctuations would not only be your sole reason to reduce your Capital gains or offset your taxable income. In order to be able to claim the losses incurred in your investments, you should be able to realize the losses. Here the act of realization of losses in an investment indicates the act of selling the investments.

If you are willing to obtain a reduction in your income which is taxable for the year 2020, you must sell those investments on which you had paper losses in the year 2020. Hence, the investments would sell for an amount which is less than the amount at which those investments were bought.

c.Retirement Accounts

Usually, the value of your IRA or 401(k) will not affect your taxes. The traditional IRAs and the 401(k) plans are said to be funded by the help of pre-tax income. According to the Federal Government, these can be considered as ‘paper’ income.

However, if you have a Roth IRA then your taxes would be affected by it. In case there is a loss of value for your Roth IRA hen you would be able to claim that loss on your taxes. But, if you wish to claim your Roth IRA loss on taxes then you will have to close any similar IRAs which you already have.

The theory of Stock Market Recovery

However, amidst all these precautionary measures and preparations to stabilize finances, one thing which must be kept in mind is that the current market situations will turn around in the upcoming few months.  Currently, market losses and its impacts are being experienced worldwide and in such scenarios, it would be wiser to evaluate your risks and your investments as well.

Hence, if you have been able to push through your paper losses during market fluctuations you would be able to have much higher capital gains once the market bounces back.

References

1. https://blog.taxact.com/coronavirus-and-stock-market-drops/ 
2. https://economictimes.indiatimes.com/tdmc/your-money/is-there-a-need-to-rejig-your-finances-due-to-the-impact-of-covid-19-on-economy/financial-markets/articleshow/74827271.cms?from=mdr