I Started Investing This Year, What Do I Need to Know Come Tax Time?

401K, IRA, Stocks Watering Can Sprinkles Money On A Plant In A Jar Of Money

When I first started investing in the stock market, I wasn’t quite sure what I was doing. I wasn’t sure if my purchases would lose value the moment I bought them or if they would grow into exponential figures. I was also scared that my hard-earned money was going to vanish, and to top it all off, I didn’t know how to report my investments on my taxes.

The stock market can definitely be an intimidating place! Fortunately, the taxes related to your investments don’t need to be. 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.

Expect to Receive Tax Forms

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.

So what are common taxable events?

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 less than a year, 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. 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 get a tax deduction!

*End-of-year tip: If you have losing stocks, you can sell them so you can offset some gains and lower your taxes.

Sale of Cryptocurrency

If you are new to trading cryptocurrency 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 cryptocurrency. Additionally, how the virtual currency is used also has an impact on how the virtual currency is taxed. When you sell cryptocurrency 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.

Don’t worry about knowing how to report your cryptocurrency transactions. The newly redesigned TurboTax Premier will easily guide you through your crypto transactions, and TurboTax Online now supports uploading more than 2,000 cryptocurrency transactions at one time, covering the vast majority of taxpayers with crypto.

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.

Keep Accurate Records

Brokers will keep good records of your transactions, but it never hurts to double-check. It will be important information to have once you sell that stock, mutual fund, etc. TurboTax Premier 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.

Don’t worry about knowing these tax rules related to investing. TurboTax unveiled a redesign of TurboTax Premier that tackles the biggest pain points for the 21 million taxpayers with investments in the U.S., including personalized guidance and data import to eliminate work. If you want additional assurance you can connect live via one-way video to a TurboTax Live Premier CPA or Enrolled Agent with an average of 15 years experience to get your tax questions answered. TurboTax Live Premier CPAs and Enrolled Agents are available in English and Spanish year round and can also review, sign, and file your tax return.

Comments (1) Leave your comment

  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

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