401K, IRA, STOCKS I Started Investing This Year, What Do I Need to Know Come Tax Time?

401K, IRA, STOCKS I Started Investing This Year, What Do I Need to Know Come Tax Time?

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 start of the coronavirus contributed to stock prices dropping, and many jumped into investing for the first time, especially when it came to Millennials and Gen Z. The ability to easily trade and invest with a rise of investment apps like RobinHood, Stash, Acorns, and Coinbase also attributed to the increase of investors in the last few years.

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 report your investment income with automatic import from thousands of financial institutions and get unlimited tax advice from real tax experts with TurboTax Live Premier! TurboTax Live Premier also helps you calculate capital gains/losses and even set up new rentals and report depreciation.

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. 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!

If you sold stock last year, check out our free Capital Gains Interactive Calculator, that 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.



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.

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.

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 Capital Losses Can 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 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.

TurboTax Has You Covered

Don’t worry about knowing these tax rules related to investing. TurboTax redesigned TurboTax Premier which tackles the biggest pain points for the over 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 tax expert with an average of 12 years experience to get your tax questions answered.

TurboTax Live Premier tax experts are available in English and Spanish year round and can also review, sign, and file your tax return. You can even connect virtually with a dedicated tax expert who will prepare and file your tax return in entirety with TurboTax Live Full Service without you ever leaving home.

TurboTax Premier can help you accurately figure out your gains and losses, and it’s the only major online tax preparation software that supports importing over 1,500 stock and 2,250 cryptocurrency transactions at once directly from financial institutions, saving you time and ensuring accuracy. TurboTax Premier has partnered with over 300 financial institutions and investment platforms to allow you to auto-import your investment info seamlessly when doing your taxes.