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

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

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.


All you need to know about Capital Gains taxation and DTAA for your Indian and US investments

All you need to know about Capital Gains taxation and DTAA for your Indian and US investments

All you need to know about Capital Gains taxation and DTAA for your Indian and US investments

Capital Gains taxation To ensure that residents do not end up paying taxes at two different places, several countries get into a mutual agreement. The Double Taxation Avoidance Agreement is one such example. The United States of America and India have a rather comprehensive DTAA.

The DTAA is applicable to any individual, company, trust or partnership who have taxable income in both India and the USA. As per the agreement, the following taxes are levied by both countries.

  • The United States of America imposes the Federal taxes as per the Internal Revenue Code. It doesn’t include any accumulated earning taxes, social security taxes and personal holding taxes. The taxes are also applicable to insurance premiums paid to insurers in India as well as any private foundations.
  • India levies the Income Tax on the income that you a taxpayer earns in the country. It includes any surcharges but excludes undistributed income declared by some companies.

There are three major ways in which the DTAA can come into the picture.

Tax Credit

In the tax credit mechanism, your country of residence will offer you with tax credits for the taxes paid in the foreign country. This usually is divided as Tax Reserve method, Underlying Tax Credit method or Ordinary tax credit method.

Tax Exemption

In the tax exemption mechanism, the country of your residence exempts any income from the foreign country.

Tax Deduction

In this mechanism, the taxes that you pay in the country where your source of income is then deducted from your total global income and you need to pay taxes only on the residual amount.

Residential Status

Your residential status plays a crucial role in determining which country you should pay your taxes in or how to file your returns. According to Indian laws, if any individual stays for 182 days or more for a financial year, he/she is liable to pay taxes. Similarly, if they have stayed in the country for more than 365 days in the last 4 years and at least 60 days in the current taxable year, they need to pay taxes.

For the USA, the citizenship decides whether or not they should pay taxes. If a person is not a citizen, he/she is a non-resident alien. In such cases, either the substantial presence test or the green card test comes into the picture.

Immovable Property

If you have any immovable property such as real estate, the income generated on selling the same or other incomes from it such as forestry or agriculture will be taxed in the same State. This means, that your property and any earnings from it for a specific financial year will be taxed in India if it were done in India or the USA if it were present in the USA.

Income Through Interest

Any interest that you earn from financial institutions is subject to taxation in the country of residence. However, you might end up paying taxes in the country that you earn the interest owing to certain conditions. For example, if the interest that you earn does not exceed 15% of the gross interest amount that you earn.

Dividend Income

If are a resident of the USA and earn dividends from an Indian country, it will be taxed in the USA. However, it might be subject to taxation in India if it doesn’t exceed certain levels. These include:

  • 15% of the gross dividend amount if the individual own at least 10% of the stocks in a company.
  • 25% of the gross dividend in all other cases.

Being aware of the DTAA will help you avoid paying double taxes in both the countries.