Understanding Taxes on Investments 

By Heather Hoffman, Marketing and Communications Specialist

Tax season is in full swing! Whether you choose to get your taxes done through a Certified Public Accountant (CPA) or an online service, it’s important to have a good understanding of what to expect from your taxes. When it comes to investments, it can be confusing to know when to plan to pay taxes. Keep reading to see what happens in different scenarios.  

I haven’t sold the stock.

If you have not officially sold the stock, then you will not pay taxes yet. Even if the value has gone up, it is regarded as an unrealized gain. Unrealized gains and losses are just the current evaluation of the stock while it is still invested.

I had the stock for a year or less, and I sold it at a profit.

Short-term capital gains tax applies to any sale resulting in profit for an investment held for a year or less. This tax rate is the same as your income tax bracket.

I had the stock for over a year, and I sold it at a profit.

Long-term capital gains tax is applicable to a for-profit sale of an investment held for longer than one year. The rate differs, depending on your filing status and taxable income. It can be 0%, 15%, or 20%. Usually, long-term capital gains tax is lower than short-term.

I was paid dividends.

Even if you have not sold any investments, or sold them at a loss, you will still pay taxes on any dividends you earn. Nonqualified dividends, also called ordinary dividends, have a tax rate equal to your regular income tax bracket. For qualified dividends, the rate depends on your filing status and taxable income; it is either 0%, 15%, or 20%. Paying attention to how and when your dividends pay out can help you prepare for tax increases.

I sold stock, when do I actually pay the tax?

Taxes from the sale of stocks or dividend payment are incurred in the same tax year. You receive a 1099 from your broker dealer that totals your gains and losses. To avoid a large tax payment hitting you by surprise, it might be a good idea to pay estimated taxes before the bill officially comes, depending on the amount of the dividend.

Will I pay the net investment income tax?

If you’re a single filer making $125,000, a married filer jointly making $250,000, or a head of household making $200,000, you may be subject to a 3.8% net investment income tax. The IRS puts this tax on the lesser of either your net investment income or the amount your modified adjusted gross income exceeds the previously mentioned amounts.

What are some tax saving strategies I can use?

Typically, keeping your investments for longer periods of time results in lower tax payments. For dividends to be considered qualified, you must hold the stock for more than 60 days out of the 121-day period that began 60 days before the ex-dividend rate. When you hold an asset for longer than a year, it is subject to a lower tax rate.

Should I utilize tax-loss harvesting?

Some investors might choose to use tax-loss harvesting to offset taxes. Your total sale of stocks is either your net capital gain or net capital loss, depending on which is greater. If you end with a net capital gain, the investments you sold at a loss still went towards reducing that total tax amount. If you have a net capital loss, you can offset your ordinary income by a maximum of $1,500 for individuals and $3,000 for joint filers.

Of course, we cannot create a comprehensive list of all the situations you might find yourself in regarding taxes and investments. Every situation is different, which is why working with financial professionals can help put you on the right course. It is important to not lose sight of your long-term investment strategy and goals. Just because something might give you tax savings in the short term does not necessarily mean it’s the best way to achieve your financial goals.

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.