First Time Investors, Here’s What You Need To Know About Taxes

The number of people investing in stocks has increased over the years, particularly among Millennials and Gen Z. Investing for your future as well as retirement is important, but the tax implications can often be unpredictable. Here are some helpful tips to guide you as you begin your journey as an investor.

Whether you are new to investing or have years of experience, it is important to understand how your investments will impact your taxes. Keep reading to learn what records you should keep, how the sales of investments would be treated, and the difference between short-term and long-term capital gains and losses.

Key Takeaways

• Keep accurate records of your investment transactions, including dates, numbers of shares, cost basis, and fees, to ensure you’re accurately reporting your gains and losses and taking advantage of potential tax deductions.
• Understand that taxes are only assessed on realized gains, not paper profits, so you won’t owe taxes on investment growth until you sell; consider holding onto winning stocks for at least a year to qualify for lower long-term capital gains tax rates.
• Don’t let capital losses offset your gains – if you have more losses than gains in a year, you can deduct up to $3,000 of those losses against your ordinary income, and carry over any remaining losses to future tax years to reduce your tax bill.
• Be aware of the net investment income tax (NIIT) and how it may impact your investment income – if you’re single and your modified adjusted gross income is over $200,000, you may owe an additional 3.8% tax on your investment income, so consider consulting a tax pro to minimize your tax liability.

Keep Good Records

Although modern-day brokerages and investment apps have transaction records, they’re not always perfect. It’s always good to have a backup transaction log of what you purchased, including the purchase date, number of shares, cost basis, as well as a record that includes commission and other fees. If there are mergers and acquisitions, or other similar company events, record those details as well.

Taxes Are Assessed On Realized Gains

For many new investors, it’s not clear how 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 taxes when you “realize” the gain. This only happens when you sell the investment. 

For example, 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, year after year, without being taxed.  The gain will only be recognized as a capital gain when you sell the stock.

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 realized loss. When you actually sell that stock, you will realize that capital loss and it will be reported on your tax return.

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 those transactions occurred in the same tax year, the gain is offset by the loss, and you will owe nothing in taxes since the overall capital gain or loss is zero.

Long Term vs. Short Term

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

Your gains are taxed at the short-term capital gains rate when you sell an investment after holding it for one year or less. Your gains are taxed at the long-term capital gains rates when you sell an investment after holding it for more than a year.

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

Long-term capital rates are lower than your ordinary income rates. The rates are either 0%, 15%, or 20%, and the rate is dependent  upon your taxable income and filing status. 

Capital Losses Can Offset Income

If you have more capital losses than gains in a year, you can take up to $3,000 of those capital losses and apply it against your ordinary income, thereby reducing it. Any capital loss remaining after using that $3,000 can be carried forward to future tax years indefinitely until it is fully used up.

Net Investment Income Tax

One more thing to be aware of is the net investment tax. If your modified adjusted income is over $200,000 if you are single or head of household, over $250,000 if married filing jointly, or over $125,000 if married filing separately, you may be subject to the net investment tax of 3.8%. This extra tax of 3.8% is imposed on the lessor of your net investment income or on the amount where your modified adjusted gross income exceeds the threshold amounts.

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.