Stocks and Taxes: Guide to Reporting Stock Investments on Your Tax Return

Updated for tax year 2024.

Did you buy stocks for the first time recently? If so, congratulations! Investing in the stock market can be a great way to put your money to work for you and grow your net worth. That said, investment income also comes with tax implications that you should be aware of as a taxpayer.

To make things easier, we’ve compiled the following guide to help you understand how stocks and investments can impact your tax bill. We’ll give you some tips for reducing your tax burden and walk you through how to report your stocks and investments when filing your federal tax return.

At a glance:

• Selling stocks for profit results in capital gains, which must be reported on your tax return.
• Dividends and interest earned from investments are also generally considered taxable income.
• Financial institutions should send you tax forms detailing your taxable investment income, which you can easily report using TaxAct®.

Understanding taxes on stocks

What are the tax implications of selling stock?

While owning investments can be good, it can complicate your tax situation. Stocks and other capital assets must be reported on your tax return, and you may have to pay taxes on interest earned, dividends, or capital gains from selling the stocks.

Does selling stock count as income?

The sale of stock for a profit results in a capital gain. Capital gains are typically included in your taxable income but can be taxed lower than ordinary income tax rates.

In the following sections, we’ll examine each scenario in more detail to better understand how capital gains, interest, and dividends are taxed.

Scenarios and examples: How to pay taxes on stocks

Paying taxes if you buy or sell stock investments

If you sold some of your investments during the tax year, you may need to pay taxes on any capital gains you had. As we’ve learned, capital gains are the profits you earn from selling stocks.

Capital gains tax rates depend on how long you hold the investment before selling:

• Short-term capital gains tax is a tax on profits from selling a stock you owned for one year or less. Short-term gains are taxed like regular income based on your federal income tax bracket.
• Long-term capital gains tax is a tax on profits you made from selling an investment you owned for over a year. Long-term gain tax rates are generally more favorable and can be 0%, 15%, or 20%, depending on your filing status and income.

The formula for determining your capital gain is simple: sale price – purchase price (cost basis) = capital gain.

If you happen to sell a stock for less than what you bought it for, the resulting loss is called a capital loss. The difference between your capital gains and losses is called your net capital gain or net capital loss.

Tax Tip: Your purchase price is often called your cost basis for tax purposes. Sometimes, other costs, such as brokerage account fees, can be added to your cost basis to lower your realized gain. Learn more about how to calculate cost basis.

Paying taxes on dividends and interest

If you own shares of stock or index funds, companies may periodically pay you in dividends. Dividends are often considered taxable income and must be reported on your tax return.

There are two types of dividends:

• Nonqualified dividends (ordinary dividends): Like short-term capital gains, ordinary dividends are taxed as ordinary income and subject to federal income tax rates. You might receive nonqualified dividends as distributions from corporations or mutual funds.
• Qualified dividends: The tax rate for this kind of dividend is 0%, 15%, or 20%. Like long-term capital gains, your filing status and income determine your tax rate. The IRS has specific rules for qualified dividends, including holding periods, which can be found in IRS Publication 550 (page 28).

Your brokerage will send you Form 1099-DIV during tax season, showing the total qualified and nonqualified dividends you received during the year.

Similarly, if you earn interest on any bonds, you will need to report it and likely pay taxes on it. You should receive a 1099 form detailing any taxable interest income, so keep that safe with your other tax forms.

Frequently asked questions about stocks and taxes

How long do I need to hold stock to avoid taxes?

If you want to avoid taxes or pay the least amount of tax when selling your investments, here are some suggestions to keep in mind:

• Timing: If practical, hold the asset longer than one year before selling to take advantage of long-term capital gain tax rates.
• Tax-loss harvesting: Don’t be afraid to sell some stocks at a loss to help offset your capital gains. If your losses exceed your gains, you can use net capital losses to offset up to $3,000 of your ordinary income ($1,500 if you’re married filing separately). You can also carry forward any net losses over $3,000 and roll them into future tax years.
• Reduce income in other ways: Before selling a stock for a substantial profit, consider other ways you might be able to lower your taxable income, such as making contributions to a retirement account, investing in your business, or taking other tax-saving measures.

Tax Tip: Sometimes, robo-advisors may offer free tax-loss harvesting services.

Do I have to pay taxes on stock I don’t sell?

No, you won’t owe taxes on capital gains if you didn’t sell any of your investments during the tax year. However, you may still owe taxes on any dividends and interest you earned.

How can I prepare for paying taxes on stocks?

After tax filing, you may be tempted to tuck all your tax information away and leave your investments alone. However, this is the perfect time to get your ducks in a row for next year.

Consider the amount of tax you owed on your investments this year, if any. As you continue to invest and your money grows, your taxes will likely continue to increase. To avoid paying even more taxes, you may also want to consider a tax-advantaged investment vessel, such as a 401(k), Roth IRA, traditional IRA, or health savings account.

How to report stocks and pay taxes with TaxAct

Starting to invest complicates your tax situation, but don’t let it worry you. TaxAct is here to help you navigate all the additional forms you need to report stocks and investments on your tax return this year.

To start, gather all tax forms and documentation you received. That may include Form 1099-DIV, which shows how much each company paid you in dividends. You may also receive Form 1099-B, which details any capital gains or losses you had during the year.

Next, it is time to file your taxes. If you’re a DIY filer, our tax preparation software will walk you through the tax filing process and provide the support you need to accurately report your capital gains, dividends, interest, and other taxable income.

Recap: The importance of reporting your stock investments

Investing in stocks can significantly grow your wealth, but it’s crucial to understand the tax implications if and when you decide to sell. By knowing how capital gains, dividends, and interest are taxed, you can make informed decisions and reduce your tax burden. To minimize taxes on stocks, hold investments for over a year to benefit from lower long-term capital gains rates, utilize tax-loss harvesting, and consider using tax-advantaged accounts.

Tools like TaxAct can simplify the reporting process, ensuring you stay compliant with tax laws when reporting and paying taxes on stocks. By staying informed and proactive, you can maximize your investment returns while minimizing your tax liabilities, allowing you to enjoy the financial growth that comes with being a savvy investor.

This article is for informational purposes only and not legal or financial advice.

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