The stock market has had a second positive day being up around 2% after the past several dismal weeks. Per CNBC, the S&P 500 has lost almost $2 trillion in market capitalization in the last week and a half alone. The 2008 stock market crash appears to still be fresh in investors’ minds with all the buying and selling. If you choose to make stock market moves, keep in mind this can have several impacts on your tax return:

Getting Out

 If panic set in and you sold off your stock portfolio (hopefully before it dropped significantly) you will have short and long term losses.  Short term classification is for investments held less than a year and long term is for all investments held a year or more. These losses are limited to $3,000 a year after they are used to offset current year gains.

Cashing In

Harvesting losses mentioned above is not necessarily a bad thing if you sold stocks at a large gain earlier in the year. These losses could be used to offset past and future gains in the market.

Buying Low

If cash flow is there, there is the temptation to get into the market while it is low. While we are not advising on investment strategy, if you do buy consider how long you hold the stock before selling. Selling appreciated stock before a year is over will result in short term capital gains. Short term capital gains are taxed at ordinary income tax rates like interest income and wages. Long term capital gains receive a preferential rate of 15% (this can fluctuate depending on income tax bracket).

Purchasing Growth versus Income

 Buying stocks in the “growth” category typically will not have current tax implications since they are raising capital and not paying large dividends. Income stocks could pay quarterly dividends that will impact your taxes. Be sure to research which stocks you are getting into to determine their growth versus income nature. Buying qualified investments will result in dividends being treated like long term capital gains mentioned earlier at a 15% rate. In general, most regular dividends from US companies with normal company structures (corporations) are qualified.

Work with your investment advisor to pick the stock market strategy that works best for you both financially and from a tax perspective.