Do you pay taxes on stock gains that are just returning to their original purchase price?
You don't generally pay capital gains taxes until you sell the stock. If you bought it in 2013 and the price goes up in 2014 but you just hold on to the stock, you won't have to pay any taxes on it. If you then sold it in 2015 for a profit, you'd have to pay capital gains taxes on the profit. Note that this excludes dividends. Dividends may complicate the matter somewhat. I'm also assuming you are in the U.S. or Canada, or a country like one of those two. It's possible some other country does taxes differently, though it'd surprise me. The tax is only payable on the gain you make  i.e the difference between the price you paid and the price you sold at. In your cse no tax is payable if you sell at the same price you bought at
"Your employer sends the money that you choose to contribute, plus employer match if any, to the administrator of the 401k plan who invests the money as you have directed, choosing between the alternatives offered by the administrator. Typically, the alternatives are several different mutual funds with different investment styles, e.g. a S&P 500 index fund, a bond fund, a money-market fund, etc.  Now, a statement such as ""I see my 401k is up 10%"" is meaningless unless you  tell us how you are making the comparison. For example, if you have just started employment and $200 goes into your 401k each month and is invested in a money-market fund (these are paying close to 0% interest  these days), then your 11th contribution increases your  401k from $2000 to $2200 and your 401k is ""up 10%"". More generally, suppose for simplicity that all the  401k investment is in just one (stock) mutual fund and that you own 100 shares of the fund as of right now.  Suppose also that your next contribution will not occur for three weeks when you get your next paycheck, at which time additional shares of the mutual fund will be purchased Now, the value of the mutual fund shares (often referred to as net asset value or NAV) fluctuates as stock prices rise and fall, and so the  401k balance = number of shares times NAV changes in accordance with these fluctuations. So,  if the NAV increases by 10% in the next two weeks, your 401k balance will have increased by 10%.  But you still own only 100 shares of the mutual fund. You cannot use the 10% increase  in value to buy more shares in the mutual fund  because there is no money to pay for the additional shares  you wish to purchase.  Notice that there is no point selling some of the shares (at the 10% higher NAV) to get cash  because you will be purchasing shares at the higher NAV too. You could, of course, sell shares of the stock mutual fund at the higher NAV and buy shares of some other fund available to you in the 401k plan.  One advantage of doing this inside the 401k plan is that you don't have to pay taxes (now) on the 10% gain that you have made on the sale. Outside tax-deferred plans such as 401k and IRA plans, such gains would be taxable in the year of the sale.  But note that selling the shares of the stock fund and buying something else indicates that you believe that the NAV of your stock mutual fund is unlikely to increase any further in the near future. A third possibility for your 401k being up by 10% is that the mutual fund paid a dividend or made a capital gains distribution in the two week period that we are discussing.  The NAV falls when such events occur, but if you have chosen to reinvest the dividends and capital gains, then the number of shares that you own goes up.  With the same example as before, the NAV goes up 10% in two weeks at which time a capital gains distribution occurs, and so the NAV falls back to where it was before.  So, before the capital gains distribution, you owned 100 shares at $10 NAV which went up to $11 NAV (10% increase in NAV) for a net increase in 401k balance from $1000 to $1100. The mutual fund distributes capital gains in the amount of $1 per share sending the NAV back to $10, but you take the $100 distribution and plow it back into the mutual fund, purchasing 10 shares at the new $10 NAV.  So now you own 110 shares at $10 NAV (no net change in price in two weeks) but your 401k balance is $1100, same as it was before the capital gains distribution and you are up 10%.  Or, you could have chosen to invest the distributions into, say, a bond fund available in your 401k plan and still be up 10%, with no change in your stock fund holding, but a new investment of $100 in a  bond fund. So, being up 10% can mean different things and does not necessarily mean that the ""return"" can be used to buy more shares." One piece of information you didn't mention is how much you paid for the original home.  If you hold onto that home for too long you will have to pay capital gains on the difference between sale price and original price. This can be a TON of money, thousands of dollars easily. The rule is: If you lived in a home for 2 out of the past 5 years, you don't have to pay the capital gains tax. So  if you just moved, you have 3 years to sell.  Perhaps as a compromise you can try renting it for 3 years and then selling it a few months before the deadline. "All right, I will try to take this nice and slow. This is going to be a little long; try to bear with me. Suppose you contribute $100 to your newly opened 401(k). You now have $100 in cash and $0 in mutual funds in your 401(k) (and $100 less than you used to somewhere else). At some later date, you use that money within the 401(k) to buy a single share of the Acme World All-Market Index Fund which happens to trade at exactly $100 per share on the day your purchase goes through. As a result, you have $0 in cash and exactly one share of that fund (corresponding to $100) within your 401(k). Some time later, the price of the fund is up 10%, so your share is now worth $110. Since you haven't contributed anything more to your 401(k) for whatever reason, your cash holding is still $0. Because your holding is really denominated in shares of this mutual fund, of which you still have exactly one, the cash equivalent of your holding is now $110. Now, you can basically do one of two things: By selling the share, you protect against it falling in price, thus in a sense ""locking in"" your gain. But where do you put the money instead? You obviously can't put the money in anything else that might fall in price; doing so would mean that you could lose a portion of your gains. The only way to truly ""lock in"" a gain is to remove the money from your investment portfolio altogether. Roughly speaking, that means withdrawing the money and spending it. (And then you have to consider if the value of what you spent the money on can fluctuate, and as a consequence, fall. What's the value of that three weeks old jug of milk in the back of your refrigerator?) The beauty of compounding is that it doesn't care when you bought an investment. Let's say that you kept the original fund, which was at $110. Now, since that day, it is up another 5%. Since we are looking at the change of price of the fund over some period of time, that's 5% of $110, not 5% of the $100 you bought at (which was an arbitrary point, anyway). 5% of $110 is $5.50, which means that the value of your holding is now at $115.50 from a gain first of 10% followed by another 5%. If at the same day when the original fund was at $110 you buy another $100 worth of it, the additional 5% gain is realized on the sum of the two at the time of the purchase, or $210. Thus after the additional 5% gain, you would have not $210 (($100 + $100) + 5%), nor $205 (($100 + 5%) + $100), but $220.50 (($110 + $100) + 5%). See how you don't need to do anything in particular to realize the beauty of compounding growth? There is one exception to the above. Some investments pay out dividends, interest or equivalent in cash equivalents. (Basically, deposit money into an account of yours somewhere; in the case of retirement plans, usually within the same container where you are holding the investment. These dividends are generally not counted against your contribution limits, but check the relevant legal texts if you want to be absolutely certain.) This is somewhat uncommon in mutual funds, but very common in other investments such as stocks or bonds that you purchase directly (which you really should not do if you are just starting out and/or feel the need to ask this type of question). In that case, you need to place a purchase order yourself for whatever you want to invest the dividend in. If you don't, then the extra money of the dividend will not be growing along with your original investment." "Yes. There are several downsides to this strategy: You aren't taking into account commissions. If you pay $5 each time you buy or sell a stock, you may greatly reduce or even eliminate any possible gains you would make from trading such small amounts. This next point sounds obvious, but remember that you pay a commission on every trade regardless of profit, so every trade you make that you make at a loss also costs you commissions. Even if you make trades that are profitable more often than not, if you make quite a few trades with small amounts like this, your commissions may eat away all of your profits. Commissions represent a fixed cost, so their effect on your gains decreases proportionally with the amount of money you place at risk in each trade. Since you're in the US, you're required to follow the SEC rules on pattern day trading. From that link, ""FINRA rules define a “pattern day trader” as any customer who executes four or more “day trades” within five business days, provided that the number of day trades represents more than six percent of the customer’s total trades in the margin account for that same five business day period."" If you trip this rule, you'll be required to maintain $25,000 in a margin brokerage account. If you can't maintain the balance, your account will be locked. Don't forget about capital gains taxes. Since you're holding these securities for less than a year, your gains will be taxed at your ordinary income tax rates. You can deduct your capital losses too (assuming you don't repurchase the same security within 30 days, because in that case, the wash sale rule prevents you from deducting the loss), but it's important to think about gains and losses in real terms, not nominal terms. The story is different if you make these trades in a tax-sheltered account like an IRA, but the other problems still apply. You're implicitly assuming that the stock's prices are skewed in the positive direction. Remember that you have limit orders placed at the upper and lower bounds of the range, so if the stock price decreases before it increases, your limit order at the lower bound will be triggered and you'll trade at a loss. If you're hoping to make a profit through buying low and selling high, you want a stock that hits its upper bound before hitting the lower bound the majority of the time. Unless you have data analysis (not just your intuition or a pattern you've talked yourself into from looking at a chart) to back this up, you're essentially gambling that more often than not, the stock price will increase before it decreases. It's dangerous to use any strategy that you haven't backtested extensively. Find several months or years of historical data, either intra-day or daily data, depending on the time frame you're using to trade, and simulate your strategy exactly. This helps you determine the potential profitability of your strategy, and it also forces you to decide on a plan for precisely when you want to invest. Do you invest as soon as the stock trades in a range (which algorithms can determine far better than intuition)? It also helps you figure out how to manage your risk and how much loss you're willing to accept. For risk management, using limit orders is a start, but see my point above about positively skewed prices. Limit orders aren't enough. In general, if an active investment strategy seems like a ""no-brainer"" or too good to be true, it's probably not viable. In general, as a retail investor, it's foolish to assume that no one else has thought of your simple active strategy to make easy money. I can promise you that someone has thought of it. Trading firms have quantitative researchers that are paid to think of and implement trading strategies all the time.  If it's viable at any scale, they'll probably already have utilized it and arbitraged away the potential for small traders to make significant gains. Trust me, you're not the first person who thought of using limit orders to make ""easy money"" off volatile stocks. The fact that you're asking here and doing research before implementing this strategy, however, means that you're on the right track. It's always wise to research a strategy extensively before deploying it in the wild. To answer the question in your title, since it could be interpreted a little differently than the body of the question: No, there's nothing wrong with investing in volatile stocks, indexes, etc. I certainly do, and I'm sure many others on this site do as well. It's not the investing that gets you into trouble and costs you a lot of money; it's the rapid buying and selling and attempting to time the market that proves costly, which is what you're doing when you implicitly bet that the distribution of the stock's prices is positively skewed. To address the commission fee problem, assuming a fee of $8 per trade ... and a minimum of $100 profit per sale Commissions aren't your only problem, and counting on $100 profit per sale is a significant assumption. Look at point #4 above. Through your use of limit orders, you're making the implicit assumption that, more often than not, the price will trigger your upper limit order before your lower limit order. Here's a simple example; let's assume you have limit orders placed at +2 and -2 of your purchase price, and that triggering the limit order at +2 earns you $100 profit, while triggering the limit order at -2 incurs a loss of $100. Assume your commission is $5 on each trade.  If your upper limit order is triggered, you earn a profit of 100 - 10 = 90, then set up the same set of limit orders again. If your lower limit order is triggered this time, you incur a loss of 100 + 10 = 110, so your net gain is 90 - 110 = -20. This is a perfect example of why, when taking into account transaction costs, even strategies that at first glance seem profitable mathematically can actually fail.  If you set up the same situation again and incur a loss again (100 + 10 = 110), you're now down -20 - 110 = -130. To make a profit, you need to make two profitable trades, without incurring further losses.  This is why point #4 is so important. Whenever you trade, it's critical to completely understand the risk you're taking and the bet you're actually making, not just the bet you think you're making. Also, according to my ""algorithm"" a sale only takes place once the stock rises by 1 or 2 points; otherwise the stock is held until it does. Does this mean you've removed the lower limit order? If yes, then you expose yourself to downside risk. What if the stock has traded within a range, then suddenly starts declining because of bad earnings reports or systemic risks (to name a few)? If you haven't removed the lower limit order, then point #4 still stands.  However, I never specified that the trades have to be done within the same day.  Let the investor open up 5 brokerage accounts at 5 different firms (for safeguarding against being labeled a ""Pattern Day Trader""). Each account may only hold 1 security at any time, for the span of 1 business week. How do you control how long the security is held? You're using limit orders, which will be triggered when the stock price hits a certain level, regardless of when that happens. Maybe that will happen within a week, or maybe it will happen within the same day. Once again, the bet you're actually making is different from the bet you think you're making. Can you provide some algorithms or methods that do work for generating some extra cash on the side, aside from purchasing S&P 500 type index funds and waiting? When I purchase index funds, it's not to generate extra liquid cash on the side. I don't invest nearly enough to be able to purchase an index fund and earn substantial dividends. I don't want to get into any specific strategies because I'm not in the business of making investment recommendations, and I don't want to start. Furthermore, I don't think explicit investment recommendations are welcome here (unless it's describing why something is a bad idea), and I agree with that policy. I will make a couple of points, however. Understand your goals. Are you investing for retirement or a shorter horizon, e.g. some side income? You seem to know this already, but I include it for future readers.  If a strategy seems too good to be true, it probably is. Educate yourself before designing a strategy. Research fundamental analysis, different types of orders (e.g., so you fully understand that you don't have control over when limit orders are executed), different sectors of the market if that's where your interests lie, etc. Personally, I find some sectors fascinating, so researching them thoroughly allows me to make informed investment decisions as well as learn about something that interests me. Understand your limits. How much money are you willing to risk and possibly lose? Do you have a risk management strategy in place to prevent unexpected losses? What are the costs of the risk management itself? Backtest, backtest, backtest. Ideally your backtesting and simulating should be identical to actual market conditions and incorporate all transaction costs and a wide range of historical data. Get other opinions. Evaluate those opinions with the same critical eye as I and others have evaluated your proposed strategy." For the employee, this is an identical tax situation to an at-the-money option purchase. They're buying an asset with a specific cost basis. For the company, you are just issuing shares from treasury as authorized... debit cash, credit additional paid-in-capital and equity. There is no tax consequence for this money received. "if you buy back the now ITM calls, then you will have a short term loss. That pair of transactions is independent, from a tax perspective, of your long position (which was being used as ""collateral"" in the very case that occurred). I can see your tax situation and can see the logic of taking a short term loss to balance a short term gain.  Referring to D Stanley's answer, #2 and #3 are not the same because you are paying intrinsic value in the options and the skew in #2, whereas #3 has no intrinsic value. Of course, because you can't know the future, the stock price could move higher or lower between #2 and #3. #1 presumes the stock continues to climb." "The price at which a stock was purchased is a sunk cost--that is, you cannot go back in time and reverse the decision you made to purchase that stock.  Another example of a sunk cost would be purchasing a non-refundable, non-transferable movie ticket.  Sunk costs have the tendency to create a cognitive bias in which we feel that the amount we paid at some point in the past should have some sort of bearing on the decision we make now--the purchaser of the ticket feels he must go see the movie even if he no longer wishes too, lest the ticket ""go to waste""... the investor hopelessly clings to a battered stock for that tiny chance that just maybe some day it will return to its former glory.  This is referred to as the ""sunk cost fallacy"" and is considered to be irrational behavior by economists. Keeping this in mind, your hopes and dreams for the stock at the time you purchased it should have no bearing on the decision you make now.  Similarly, whether the stock has risen or fallen in price since your purchase date should have no bearing.  Instead, you must consider what you expect the stock to do from this very moment on into the future--that is, you must act at the margin. You've indicated that you are faced with two choices--sell the stock now, incur the loss, but benefit from the tax break (Option A).  This benefit is quite easily quantifiable--it is your marginal tax rate multiplied by the additive inverse of the loss (assuming you have/will have other gains to offset).  Let's just assume that you incurred a $1000 loss, at a marginal tax rate of 20%, which means your tax benefit for the loss is $200. The second choice--to hold the stock in hopes of it rising in price (Option B)--is a bit harder to quantify.  You must assume that today is day zero, and that every cent in price the stock rises is a gain to you, and every cent in price the stock looses is a loss to you.  If you believe that the stock will rise to a price that will net your more than your tax benefit from option A, then holding the stock is more favorable than selling it at a loss today.  Conversely, if you believe this stock will fall even further in the future, or not rise enough to net you $200 (per the example), then Option A is preferable. Granted, there are some additional complications that play into your decision.  By selling the stock today, you not only get a tax benefit from the loss, but you've also freed up the funds previously used to purchase that stock to be invested elsewhere (in hopefully a better performing asset).  If you choose to stick with your current stock, then the gains you may have netted elsewhere must be considered as an opportunity cost associated with Option B.  Finally, the tax benefit is essentially guaranteed (so in our example, a $200 risk free return), while sticking with the stock in Option B still comes with some risk." "A nondividend distribution is typically a return of capital; in other words, you're getting money back that you've contributed previously (and thus would have been taxed upon in previous years when those funds were first remunerated to you). Nondividend distributions are nontaxable, so they do not represent income from capital gains, but do effect your cost basis when determining the capital gain/loss once that capital gain/loss is realized. As an example, publicly-traded real estate investment trusts (REITs) generally distribute a return of capital back to shareholders throughout the year as a nondividend distribution. This is a return of a portion of the shareholder's original capital investment, not a share of the REITs profits, so it is simply getting a portion of your original investment back, and thus, is not income being received (I like to refer to it as ""new income"" to differentiate). However, the return of capital does change the cost basis of the original investment, so if one were to then sell the shares of the REIT (in this example), the basis of the original investment has to be adjusted by the nondividend distributions received over the course of ownership (in other words, the cost basis will be reduced when the shares are sold). I'm wondering if the OP could give us some additional information about his/her S-Corp. What type of business is it? In the course of its business and trade activity, does it buy and sell securities (stocks, etc.)? Does it sell assets or business property? Does it own interests in other corporations or partnerships (sales of those interests are one form of capital gain). Long-term capital gains are taxed at rates lower than ordinary income, but the IRS has very specific rules as to what constitutes a capital gain (loss). I hate to answer a question with a question, but we need a little more information before we can weigh-in on whether you have actual capital gains or losses in the course of your S-Corporation trade."