What are Stocks?
Also defined as equity, a stock refers to a piece of security that signals the ownership of a fraction of the company that granted the stock. This indicates that the person who owns the stock has ownership over a fraction of the assets and profits of the company. The number of units of stock of a company that the person holds is known as “shares”.
Through stock exchanges and private selling means, one can purchase and sell stocks of various entities, which ultimately serves as a foundation stone of an investor’s portfolio. This government ensures that the investors are protected from fraudulent stock trade practices by imposing several trading rules and regulations.
Repercussions of not reporting your Stocks for Tax purposes
Using 1099-B broker filing, the IRS can figure out whether you have filed the returns on all the bought stocks. The less severe consequence would be that IRS will recalculate your pending tax amount and forward you a bill containing the additional amount to be paid (inclusive of the interest). However, one would face strict penalties for delaying the pending dues and income report.
It is important to note that IRS does not necessarily include the cost basis of the stock, meaning that the organization would assume zero-basis and charge tax on the entire selling amount and not only the profit earned. However, this misinterpretation can be corrected by you by filing the amended return, along with the penalty and interest amount charged.
A person has a three-year time for paying off the interest dues. But unfortunately, there are many people who wait for the three-year period to come to a close to paying off the dues and many of them miss the deadline, which ultimately leads to strict consequences. From the beginning, the IRS presumes carelessness and disorganization as the key reasons for not reporting the income within the specified deadline.
Non-reporting of Stock Taxes in India
The income tax department of India has introduced numerous changes in Form 26AS. One of the most notable amendments is that starting from the financial year 2020 to 2021, the 26-AS statement would only reflect those financial transactions, which are linked with the PAN number of the party. This, along with other changes has made non-reporting almost impossible.
Although the same changes are not applicable to stock trading, one must still report all the stock-related transactions, regardless of the losses incurred, for appropriate assessment of taxes. This is because the provision of PAN linking of stock-related transactions makes the transaction visible to the Income Tax department for record-keeping. The primary purpose of Form 26AS is just like an update mechanism to the income tax department.
One must disclose all the facts and figures of profits earned or losses incurred for avoiding penalties and punishments. It is also vital to get a tax audit done wherever necessary. If you fail to comply with the aforementioned guidelines and rules, then income tax can investigate your ITR shortcoming, and if found guilty, then they would impose hefty fines and tax liabilities upon you.
One will encounter non-reporting repercussions only if he fails to fulfil the guidelines of taxes within the 3-year period. After the period is over, the person would receive a scrutiny notice from the Income Tax department, following which you cannot modify your ITR.
It is important to know that the Income Tax Department has a smooth ITR processing process at the places of reporting, CA audit report furnishing. Their process of ITR processing is reliable and the chances of getting a false scrutiny letter or any other misinterpretations are next to none.
Do we have to Pay Taxes on Stocks even after incurring Losses?
Apart from the fact that the shares are owned by the investor, you must pay taxes on the stocks regardless of if you earn profit or incur losses. The investor is said to realize a capital gain or loss when he/she sells the stock. By subtracting the net proceeds of the sale from the cost basis, the investor can calculate his/her amount of gain or loss, wherein:
- Net proceeds: They are calculated by subtracting the gross sale from the sales costs (inclusive of the broker’s commission).
- Cost basis: It is calculated by adding the paid share price and transaction costs.
If the net proceeds are more than the cost basis, then the investor incurs a profit and vice versa.
Conclusion
Whenever we create a new source of income, we create a new interest point for the IRS simultaneously. With that being said, the investors must not only focus on usual concerns of deductions and missing income but must also be concerned about sincere maintenance of the income that they earn through bonds, real estate, stocks, and other types of short-term as well as a long-term investment.