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 I wasn’t sure how to report it 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 congratulate you on your smart, long-term move and then I can explain how the taxes will work.

Expect to Receive Tax Forms

Like anyone who pays you during the year, you will get tax forms if you had 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. It is not a taxable event in a 401(k) or Roth IRA. 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, it’s 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 you held the security for less than a year, it’s taxed as a short-term gain. If you 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. 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.

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. You don’t want to rely entirely on their records because they aren’t perfect. If you keep an eye on the forms in the mail, tax time will be a breeze even with the added work!

Don’t worry about knowing these tax rules. TurboTax will ask simple questions about you and give you the tax deductions and credits you’re eligible for based on your entries. If you have tax questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent to get your tax questions answered. A TurboTax Live CPA or Enrolled Agent can even review, sign, or file your tax return.

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