Tax Considerations When Investing

Investing is an important way to prepare for the future – but what does it mean for your taxes? Read on for an FAQ about tax considerations to keep in mind when making investment decisions.

When Are Investment Assets Taxed?

The first important thing to know is that you don’t need to pay any taxes on your stock gains until the stock is sold. In other words, if you purchased a stock at $50 per share and now it’s worth $55 per share, that $5 per-share gain isn’t considered taxable income until you sell it. As long as the stock is just sitting in your portfolio, going up and down with the market, there’s no tax liability.

Once you sell the stock, any monetary gains you make from that sale are taxable.

How Much Tax Will I Pay?

Your tax rate on any investment depends on how long you held the asset; be it a stock, mutual fund, or another kind of asset such as an art or real estate investment. In general, the longer you held the asset the less tax you will pay. If you had the asset for more than a year, you’ll pay the long-term capital gains tax. Under a year, you’ll pay the short-term capital gains tax. Long-term capital gains taxes are either 0%, 15% or 20%, depending on factors such as your income and filing status. Short-term capital gains taxes start at 10% and go up to 37%, in 2022. You may view federal tax gain information on the IRS website.

In other words: holding an investment asset for over a year may have a significant impact on lowering the amount of tax you owe. This is why non-professional traders are often recommended to be wary of frequent trading in their portfolio.

Does My Income Affect Tax Rates?

Yes! Your tax rate on investments is dependent on your income and filing status (married, single or head of household). For example, a single taxpayer with an income under $41,675 isn’t subject to any long-term capital gain tax in 2022, whereas that taxpayer’s tax rate will rise to 15% if they make between $41,676 - $459,750. An online calculator can help you to understand what tax rate to expect on your investments.

What If My Stock Loses Money?

Similar to capital gains, capital losses are only relevant to your tax bill once a stock has been sold. If you do sell a stock for less than you purchased it, you can report this as a capital loss on your tax return to offset either your capital gains, or if you had no capital gains, your income. Either way, be sure to report capital losses so you can take advantage of the reduction in taxable income.

Do I Also Owe State Taxes?

Each state has its own approach to taxing capital gains from investments. States with higher sales and property tax but no income tax, such as Florida and New Hampshire, also don’t have capital gains taxes. Other states, such as Colorado and Montana, do subject capital gains to taxes under the state income tax, but offer special exclusions and offsets for capital gains to reduce the tax burden on investors. Some states, including Massachusetts, tax short-term gains at a higher rate than long-term gains.

What About Dividends?

Stock dividends received from investments also count as taxable income. Most dividends from a U.S. entity are considered “ordinary” and will be taxed at the investor’s normal rate of income tax, as long as the investor has held the shares for a set holding period of more than 60 days before and after the dividend payment. (The holding period is 90 days for preferred stocks, which are a fixed-income security that pays out dividends on a set schedule). On the other hand, non-qualified dividends – from a stock that doesn’t meet the holding period requirements, or comes from certain foreign investments – are taxed similar to long-term capital gains, with tax brackets of 0%, 15% and 20%, depending on your income and filing status.

The IRS offers more information on dividend taxes online, but in general, it’s a good idea to speak with a professional if you have any questions about your specific dividend tax situation.

Where Can I Learn More?

The IRS website is the source of all tax information. Visit www.irs.gov to learn more about tax considerations when investing. You may also contact a tax professional who can provide information on your specific situation. The information in this article is intended for general educational purpose and is not tax advice.