What Do a Video Game Store, Some Computer Nerds, and Wall Street Have In Common?

A few months back you may have heard about the whole GameStop, Wall Street fiasco, and perhaps it even intrigued you enough to dip your toe into the investing pool. After all, if these computer nerds can make a killing buying stock in a dying video game store, why can’t you? But before you go searching for the cheapest stocks, let’s break down what exactly happened and what you need to know when it comes to gains.

First, a little Wall Street 101. The stock market, much like consumer goods, is based on supply and demand. If lots of people purchase stock in a company and choose to hang onto it, the demand, and therefore the price, increases. Alternatively, when many people sell shares of a stock, the demand and price both decrease.

The big guys on Wall Street (hedge fund managers) like to take advantage of these low-demand stocks to practice “shorting” or “short selling.” What does that mean? Basically, they sell shares of stock when the price is high, wait for the demand/price to drop, and then buy back the shares they originally sold at a much lower cost. Sounds easy, but this is risky because you have to be 100% certain that the demand is going to drop to get your money back or make a profit.

And this is exactly what happened with GameStop earlier this year when Reddit users suddenly began buying up all the cheap shares of stock. This increased the demand and the price, which meant those hedge fund managers had to sit back and watch their profit margins decrease by the minute. Of course, they panicked and started buying their GameStop stock, which only made the problem worse.

So why does all of this matter to you? Well, if you’re putting your hard-earned money into the stock market, the big takeaway is knowing what you will need to set aside for taxes. What we really want you to know is the difference between tax on short term and long term gains. Short-term capital gains are considered ordinary income and are therefore taxed at your normal tax bracket rate:

However, if you hold onto these gains for 12 months, they’re considered long-term and are taxed at a much lower rate. Just check out this chart below:

Long (and pretty funny) story short, we are not financial advisors, nor are we fortune tellers, so please do not ask if you should buy or sell. We are only sharing this information so you have an understanding of all the hubbub, and to make sure those new to the game understand the tax consequences.

If you have any questions or want to show off your capital gains, schedule a call.