There are three types of tax you have to pay when trading shares, capital gains tax, income tax and stamp duty. However you need not worry about calculating stamp duty as it is dealt with by your broker when you enter a trade. The current stamp duty you pay on entering a trade is 0.5% so if you buy £10,000 worth of stock you will have to pay £50 straight to the government.
Capital Gains Tax is paid when you make profits from your shares. Any losses from your shares can be deducted from the profits to reduce the amount of capital gains tax you have to pay.
The other type of tax you pay, income tax, is only due if you receive money from stock dividends. Note that you also pay income tax on your salary (wage) therefore you need to add money received from dividends to your salary before working out how much income tax needs to be paid.
Capital gains tax must be paid by the 31st January each year. The current 2008/2009 tax free allowance is £9,600, and gains over £9,600 will be liable for CGT. Income tax must be paid by the 5th of April and the current 2008/2008 tax relief is £6,035. Any income earned over £6,035 in the year will be liable for income tax.
Worked Example
For more detailed information on capital gains tax and income tax in the UK check out the government official webpages at http://www.hmrc.gov.uk.
Taxation laws on stocks in the US are slightly simpler than in the UK. In the US people pay only one tax that is income tax. Their capital gains on stocks are simply added to a persons income tax.
Like in the UK, capital losses can be offset against capital gains to reduce the amount of tax to be paid. People in the US also have two tax allowances, a standard deduction and a personal allowance that they can take off their gross income.
First of all to work out the tax needed to be paid on capital gains you need to know the income tax bracket you belong to.
| Marginal Tax Rate | Single | Married Filing Jointly or Qualified Widow(er) | Head of Household |
|---|---|---|---|
| 10% | $0 – $8,350 | $0 – $16,700 | $0 – $11,950 |
| 15% | $8,351– $33,950 | $16,701 – $67,900 | $11,951 – $45,500 |
| 25% | $33,951 – $82,250 | $67,901 – $137,050 | $45,501 – $117,450 |
| 28% | $82,251 – $171,550 | $137,051 – $208,850 | $117,451 – $190,200 |
| 33% | $171,551 – $372,950 | $208,851 – $372,950 | $190,201 - $372,950 |
| 35% | $372,951+ | $372,951+ | $372,951+ |
| Standard deduction | $5,700 | $11,340 | $8,350 |
| Personal exemption | $3,650 | $7,300 | $3,650 |
(source: Internal Revenue Service)
Note:If you were single and your net income comes to $25,000 you would only pay 10% tax on the first $8,350 and 15% tax on the rest.
Secondly, once you know your income tax bracket you can work out how much tax you need to pay on your capital gains using the table below.
| Your income tax bracket | Long-term Capital Gain Rate (1 year+) | Short-term Capital Gain Rate (up to 1 year) |
|---|---|---|
| 10% | 0% | 10% |
| 15% | 0% | 15% |
| 25% | 15% | 25% |
| 28% | 15% | 28% |
| 33% | 15% | 33% |
| 35% | 15% | 35% |
(source: Internal Revenue Service)
Worked Example
