Penny Stocks and Capital Gains

The whole purpose of investing in capital gains or the profits made from the investment or sale that was previous, the real cause is to make sure that on the issue of penny stock or any stocks for that matter is to get more profit on each share base on the sale price and purchase.

And for anyone looking to deal with capital gains penny stocks there are a few things they should know. One of the first things you should note is that the capital gain per share will not be high. The whole reason for penny stocks being penny stocks is that they are available for less than $10 dollars per share. There have been a few stocks that have hit some high markers in terms of gross capital and this ends up becoming a part of the list of the more powerful stock markets. The better option is if you can predict stocks then you choose the right one and purchase a lot which will in turn boost your capital gains, or maybe you would want to go on a more international stock market. Although they are penny stocks they have a possibility to arrive back to their normal share prices.

This is a very good reason why you should check the news letters very regularly, there are quite a number of news letters out there but the best one's will be cheap and will provide you a number of pick ups of stocks that occurred for the first quarter.

How to Compute Short Term and Long Term Capital Gain Tax From Investments in Stocks

Most of you must be aware that as per Income Tax Act, 1961, any income or gain from any source is liable for payment of tax. Gains from investments in stocks are liable for Capital Gain Tax, which is divided into short term and long term capital gain tax. Gains from investments held for less than one year (but more than one day) is chargeable as STCG Tax and gains from investment held for more than one year is chargeable as LTCG Tax. Calculation of profit and loss from investments in stocks and the resulting tax liability is relatively easy, as it involves simple math. However, many people are often scared when it comes to income tax calculations. In this article, I have explained how to calculate profit and loss and tax from the transactions involving investments in stock.

First of all, let me make it clear that stock trading and investment in stock are two different aspects from the point of view of income tax. In this article, I have not touched income from stock trading (day trading or Intra-Day transactions), and trading in Futures and & Options or income from speculative business, as is known in the Income Tax jargon.

Let's see how to calculate STCG and LTCG Tax.

1. Profit and Loss: Profit and Loss = Cost of Sale - Cost of Purchase (Cost of Acquisition);

Cost of sale = The gross sale or realization amount - Expenses incurred for selling the stocks

Cost of acquisition = Gross purchase amount + Expenses incurred on buying the stocks

2. Expenses: Transactions involving sale and acquisition of stocks include the following types of expenses. You can refer the Contract Notes issued by your broker to find out the exact amount of brokerage, Service Tax, Securities Transaction Tax and Other Statutory Fees

Brokerage: Brokerage paid to your brokers is the main component of expenses on sale and acquisition of stocks.

Service tax and Education Cess: Your stock broker has to pay service tax and education cess at the rate of 10.3% on the brokerage amount, which in turn is passed on to you.

Other Charges: Transactions in stock involve other statutory charges such as stamp duty, turnover tax, and transaction charges of the stock exchanges, which are also passed on to the investors.

DP Charges: It includes DEMAT annual maintenance charges and transaction charges. You can get the amounts from DP Statements issued by your broker.

Securities transaction tax (STT): Although STT is an expense for you but it cannot be claimed as a deduction from the profit and loss from investments in stocks and therefore, in your calculations of profit and loss, you have to exclude STT.

3. Capital Gains Tax: After having calculated the profit and loss, the next step is to calculate the tax liability. At present, the rate of short term capital gain tax is 15% and long term capital gain on investments in stocks is exempted from income tax, that is, long term capital gain tax is zero.

You can visit Financial Awareness Portal to get more info with practical examples on how to compute Short Term and Long Term Capital Gains Tax using a spreadsheet.

Contributing Bonds and Stocks to Charity to Avoid Capital Gains

Once your bonds have been appreciated you are advised to transfer these bonds to a worthy cause like charity. By doing this you will see a significance on your tax deduction because of this contribution. And you would be able to avoid the capital gains tax which would be due on the sale of the stock.

If you are going to cash in your stocks and bonds you should know that when receiving the funds from your brokerage house there will be a tax imposed and this tax is normally 15% if you have had the stock for at least a year. If you did not hold this particular stock for the entire year you will end up paying a rate of about somewhere between 25 and 30%. When you are complete with the sales of your bonds and have gotten the proceeds you now can contribute the necessary funds to the various charitable organizations.

And in this event both you and the charity organization will benefit from this as if the bonds are transferred straight from the account of your brokerage to the account of the charities brokerage. Because you will not come in contact with these funds there will be no capital gains taxes and also no income tax. An example of this is that you bought 500 shares at CarMax for over a year at $9 dollars per share, for a total cost of $4,500 dollars. This present day that same stock is worth $20 dollars per share or a total of $10,000 dollars.

Minimising Capital Gains Taxes When Selling Stocks

If you are located in the UK: The answer is simple really here. Instead of buying and selling stock and shares, use financial spread betting to trade. Spread betting is a form of short-term trading that is ideal for taking directional speculative positions on the stock market. In the United Kingdom and Ireland, no tax is applicable on gains made through spread betting because it is considered a gambling activity. You are also able to short markets as well. Alternatively, you can make sure of an Individual Savings Account to shelter your money from the taxman. The UK has recently introduced new rules that should be welcomed by regular share investors who want to reduce their CGT liability. Such individuals are likely to get the most from having an ISA.

If you are located in the USA: Under current USA law, you can donate appreciated stocks to charitable organizations and make a deduction on the full market value of the stocks without paying capital gains taxes if (and only if) you've held them for more than a year. So if you're planning to make a significant tax-deductible donation, don't do it in cash; donate the long-term-held stocks instead.

If you are located in Canada: In Canada, you can move your shares in a portfolio, without having to sell them, into a tax-protected program quite similar to the US 401(k). It's referred to as RRSP in Canada. You can sell without having to materialise gains at all, but it has to remain in the sheltered account in order to retain the tax protection. Having said that, in Canada, once you take the money out of the sheltered investment vehicle it's taxed normally as income.

In addition, it is worth noting that in the USA and most other European countries longer term gains like proceeds from funds are taxed more favorably. Of course it helps your tax situation if you can offset your trading and investing gains with losses like what you can do with CFDs.

Capital Gains Tax Rates in the UK

It is mandatory to pay capital gains tax if you dispose of any asset by transferring or giving it way. You are also subject to paying the CGT if you receive compensation, for example, you may receive compensation for a damaged good from an insurance company.

You do not have to pay any capital gains tax on the sale of your car, and first home, under most conditions, ISAs or PEPs, UK government gilts (bonds), income from betting, lotteries or pool winnings, or in other words, any money that is already subject to income tax.

Calculating the CGT:

When you sell an asset: Let us assume you bought some shares for £1000 and you sold them for £2000. You would need to pay CGT on the gain which in this case is £1000.

When you give an asset: It is important to point out that you need to pay CGT on the value of the asset and not what you get from it. To illustrate this, let us consider that you bought a flat for your son at £70,000 four years ago and its value has now appreciated to £100,000. Suppose you let him have it at less than the market value, £75,000. Your gain would be £100,000 minus £70,000 which is £30,000.

When you dispose of an asset: If you dispose of an asset which you received as a gift, your gain will be based on the market value when you received it. For example, you are gifted a garage whose value at the time when the gift was made was £5000. Now you sell it for £8000. Your gain in this case will be £3,000.