Investing and taxes
Investing can be a great way to grow your assets, but what do you need to know when it comes time to file your taxes? Like most tax questions, the answer depends on your specific situation.
There are typically two times when your taxes are affected by your investments.
The first is when you receive income from the investments.
The second is when you sell the investments for a gain or loss.
Of course, there are possible exceptions and TurboTax can help you identify if any of these situations apply to you when you’re completing your tax return.
Income from investments
Often, investment income includes interest and dividends. The income you receive from interest and unqualified dividends are generally taxed at your ordinary income tax rate. Certain dividends, on the other hand, can receive special tax treatment, which are usually taxed at lower long-term capital gains tax rates. Your investment brokerage company should provide information about whether your dividends are qualified or not.
Gains and losses from investment sales
You typically only have to pay taxes on the sale of investments when you receive a gain. To figure this out, you have to subtract the cost basis of your investment, which is normally what you paid, from the sale price to see if you had a gain or a loss.
If you have a gain on the sale, you’ll have to see if you owe taxes.
If there’s a loss, you may be able to offset other realized gains or take a deduction depending on your situation.
To qualify, you must first be selling a capital asset. Common examples of capital assets include:
investments such as stocks or bonds
your home
other property
There are two general types of capital gains – short-term and long-term. Short-term capital gains are for capital assets you hold for a year or less. These gains are usually taxed at your ordinary income tax rate. Long-term capital gains are for capital assets you hold for more than a year. The long-term capital gains tax rates are typically lower than your ordinary income tax rate and generally max out at 20%.
Certain types of investments have higher capital gains tax rates. The most notable exception is collectibles, such as rare stamps, coins, art and more. These types of investments typically have a long-term capital gains tax rate of 28%.
In addition to the income taxes described above, those with significant income may be subject to the net investment income tax, which is an additional 3.8% tax on top of the usual capital gains taxes.
Thankfully, you can offset your capital gains with your capital losses if you have any. Like with capital gains, there are both long-term and short-term capital losses. Offsetting your capital gains with your capital losses can seem a bit overwhelming, but here’s how it works.
First you net your capital gains and capital losses of the same kind. That means subtracting short-term capital losses from short-term capital gains and long-term capital losses from long-term capital gains.
If you end up having a short-term or long-term capital loss remaining, you can then reduce your short-term gain with your long-term losses, or vice versa.
If you still have more capital losses than capital gains in a year, most filing statuses can use up to $3,000 of remaining capital losses to offset your ordinary income.
Any excess capital losses above the $3,000 amount can be carried over to future tax years to offset future income according to the rules above.
As long as you continue using TurboTax each year to file your taxes, TurboTax can keep track of any carry-forward losses and apply them to your future tax returns.