If you are a first-time investor, let me be the first to congratulate you on your smart, long-term move and explain how the taxes on your investments work.

Investing for your future and for your retirement is one of the most important things that you can do, but the impact of investing on your taxes can also be uncertain. Fortunately, these tips will give you a solid primer on what you need to know about taxes and your investments, and they will answer questions like:

After checking out the below tips, get ready to accurately report your investment income with TurboTax Premium or have your taxes prepared from start to finish by a TurboTax Live Full Service expert.

What to Expect if I Invested?

Like any employer who pays you during the year, you will get tax forms for any taxable events. The IRS requires these forms from the mutual fund companies and brokerage houses, so you’ll also get a copy to help you complete your taxes.

You will not get tax forms if you have not had taxable events. If you have any tax-deferred or tax-free accounts, many of those taxable events will not actually be taxable. For example, in a taxable brokerage account, a common stock paying a dividend is a taxable event. However, dividends in a 401(k) or Roth IRA are not considered a taxable event. You won’t get a Form 1099-DIV associated with that payment at the end of the year.

What are Common Taxable Events and Tax Forms?

Sale of a Security

If you buy a stock or mutual fund and then sell those shares, that is a taxable event. If you sold for a gain, it’s either a long-term or short-term capital gain. If you sold for a loss, it’s either a long-term or short-term capital loss. All brokers will issue a Form 1099-B to explain the sale or trade of any security.

If you have a gain and have held the security for one year or less, it’s taxed as a short-term gain. If you’ve held it for more than a year, it’s taxed as a long-term gain. At the end of the year, you offset your short-term gains with your short-term losses and your long-term gains with your long-term losses. Those are the values that get taxed at their respective rates.

If you have a net loss, you’re allowed to deduct up to $3,000 of those losses against your ordinary income like wages. If you have more than $3,000 in losses, you can carry those losses to future years. For example, if you have $5,000 in losses, you take $3,000 this year and push the $2,000 to next year. Losses aren’t fun to experience but at least you can lower your taxes by offsetting your loss!

If you sold stock last year, check out our free Capital Gains Interactive Calculator. In just one screen, you can get answers to your burning questions about your stock sales and get an estimate of how much your stock sales will be taxed and much more. You can also find out if you have a capital gain or loss and compare your tax outcome of a short term versus long term capital gain, whether you already sold or you are considering selling your stock.

Sale of Crypto

If you are new to trading crypto you may be wondering what this means for your taxes. Basically, the same rules that apply to property transactions, like the sale of stocks, apply to crypto. Additionally, how the virtual currency is used also has an impact on how the virtual currency is taxed. When you sell crypto, you have a taxable event and your gain or loss recognized is calculated as the difference between your cost (the amount spent, including fees, commissions, and other acquisition costs) in the virtual currency and the amount you received in exchange.

Previously tax filers have been confused about when to report crypto transactions or how to track their transactions. In 2021 the IRS updated a question on Form 1040 that helps clarify which virtual currency transactions should be reported on your taxes.

With TurboTax Premium, you can automatically import up to 20,000 crypto transactions at once from your crypto platform avoiding manual entry and helping you accurately report your crypto transactions.

How Taxes Are Assessed on Realized Gains?

For many new investors, it’s not clear how your investments are taxed. If you buy a stock and the value of it goes up, you do not have to pay taxes on those gains every year. You only pay when you “realize” the gain by selling the shares.

If you buy 10 shares of Company X for $10 and the stock jumps to $12, you don’t owe taxes on the $2 gain yet. It can continue to grow, without being taxed, until you sell it.

Investments go up in value, but they can also go down. When you have an investment that goes down in value, it won’t have any tax implications until you sell your investment. If you buy 10 shares of Company Y for $10 and the stock falls to $8, you have a paper loss of $2 per share, but no real loss. When you go to sell, you will realize that loss.

Realized losses can be used to offset realized gains. In the above scenario, with Company X going up $2 and Company Y going down $2, you have a realized gain of $20 and a realized loss of $20, respectively. If that were all in the same tax year, the gain is offset by the loss and you owe nothing in taxes.

Payment of Dividends or Interest

Another common taxable event is when a stock or fund pays you a dividend or interest. They’re both cash payments, which you can reinvest at your own option, but they’re taxed differently.

A qualified dividend is a cash payment by a company, typically funded by their income, and has a lower tax rate. Non-qualified dividends and interest are taxed at the same rate as bank interest.

Brokerages and mutual fund companies will send you a Form 1099-DIV for the dividends and a Form 1099-INT for the interest.

Flipping Houses

When figuring out how you will be taxed when purchasing homes to flip, how you are taxed depends on your intentions. If you purchase homes with the objective to quickly flip them, the IRS will consider you as a real estate dealer and not a real estate investor. Real estate dealers who flip homes are taxed on profits at ordinary income tax rates (10%, 12%, 22%, 24%, 32%, or 35%) based on their income, regardless of how long the property is held. Of course, if you are engaging in flipping houses you probably are planning to sell them quickly anyway. Along with being taxed at your ordinary tax rate, you’ll also be subject to self-employment taxes of up to 15.3% on your profits in addition to income taxes.

If you hold your property with the intention to rent it out, then you would be considered a real estate investor and would be taxed at capital gains rates (0%, 15%, or 20%), which for some tax filers are lower than their ordinary tax rates. If you invest in a property and rent it out and then sell it at a gain within a year or less you would pay short-term capital gains rates, which would be the same as your ordinary tax rate. Hold it for more than a year, and you’ll be taxed at the lower long-term capital gains rates (0%, 15%, or 20%), depending on your income.   

Don’t forget that regardless if you are considered a real estate dealer or a real estate investor, make sure you include everything you put into the property to fix it up in your cost basis so you can lower your gain, which in turn lowers your taxes. You can include things like flooring, structural repairs, and other home improvements so make sure to keep track of your expenses.

What is the Difference Between Long Term vs. Short Term Gains?

When it comes to your gains, it’s good to know the difference between short term capital gains and long term capital gains.

Your gains are taxed at the short term capital gains rate when you sell them and have held them for one year or less. Your gains are taxed at the long term capital gains rates when you sell them and have held them for more than a year.

The short term capital gains tax rate is based on your income tax bracket rate. If you’re in the 22% income tax bracket, then your short term capital gains tax rate is 22%.

Long term capital rates remain lower than your ordinary income rates at 0%, 15%, and 20% and are not tied to your ordinary income brackets.

How Can Capital Losses Offset Income?

If you have more losses than gains in a year, you can take up to $3,000 of those losses and apply it against your income, thereby reducing it. Any amount of loss over that $3,000 can be carried forward to future tax years indefinitely.

It’s painful to take a loss, but if you must, it’s nice that you can use it to offset higher taxed income.

What is Net Investment Income Tax?

If you are single or head of household and making over $200,000, or married filing jointly making over $250,000, or married filing separately making over $125,000 you may be subject to the net investment tax of 3.8%. This is an extra tax of 3.8% on net investment income above the threshold amount.

What Kind of Investment Records Should I Keep?

Modern day brokerages and investment apps have pretty good transaction records, but they’re not always perfect. It’s always good to have a backup transaction log of what you purchased – date, number of shares, cost basis, and to include commission and other fees. If there are mergers and acquisitions, or other similar company events, record the details for those as well. It will be important information to have once you sell that stock, mutual fund, etc. TurboTax Premium automatically imports investment transactions from hundreds of financial institutions, eliminating time and improving accuracy. TurboTax also enables investors to import more transactions across all supported investment types than any other tax software provider. With TurboTax you can automatically  import up to 10,000 stock transactions and 20,000 crypto transactions at once, eliminating manual entry and providing accuracy.

TurboTax Has You Covered

Don’t worry about knowing these tax rules related to investing. No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.

In addition, TurboTax Investor Center is a new, premier cryptocurrency* investment tax software solution that offers crypto tax and portfolio insights year round. It lets users know how their crypto transactions could affect their tax outcome, track their overall portfolio performance, and make smarter financial decisions to advance their goals. Take the guesswork out of your crypto taxes!

*TurboTax Investor Center is not a tax prep service or investment advisor. Tax estimates exclude missing transaction info and may vary based on your situation.

One response to “Tax Tips for First-Time Investors: Stocks & Taxes”

  1. Which turbo tax program do i need to buy. My income is social security, small pension and state of Wyoming retirement. I have an IRa AND 401K