Investing is a great way to grow wealth, but it also comes with tax implications that every investor should understand. Whether you invest in stocks, bonds, mutual funds, or other assets, your earnings may be subject to taxes. This guide will help you navigate investment taxation and understand how selling investments may impact your federal tax bill.

Understanding Investment Taxes

Investment income comes in several forms, each taxed differently. Here are the most common types:

• Capital Gains: Profits from selling an investment for more than you paid for it.
• Dividends: Payments distributed by companies or funds to shareholders.
• Interest Income: Earnings from bonds, savings accounts, or other interest-bearing investments.
• Distributions: Payouts from mutual funds, ETFs, or other pooled investment vehicles.

Your income level and filing status will determine how much tax you owe on these earnings.

How Are Different Investments Taxed?

• Stocks & ETFs: Gains are taxed as capital gains; dividends are taxed at either ordinary or qualified rates.
• Cryptocurrency: The IRS treats crypto as property, meaning capital gains tax applies when you sell, trade, or spend it for profit.
• Stock Options: Taxed as ordinary income upon exercise; any additional gains are subject to capital gains tax.
• Mutual Funds: May distribute capital gains that are taxed at capital gains rates.
• Real Estate & REITs: Profits from selling real estate are subject to capital gains tax, but a 1031 exchange can defer taxes. REIT dividends may be taxed as ordinary income or qualify for special treatment.
• Municipal Bonds: Interest income is tax-exempt at the federal level (and possibly at the state level).
• Annuities: Growth is tax-deferred, but withdrawals are taxed as ordinary income.
• Retirement Accounts: Tax treatment depends on the type (IRA, Roth IRA, 401(k)). Traditional accounts offer tax-deferred growth, while Roth accounts allow for tax-free qualified withdrawals.

Capital Gains Tax Explained

When you sell an investment for a profit, you generate a capital gain, which is subject to tax. The tax rate depends on how long you held the asset before selling:

• Short-Term Capital Gains: Apply to assets held for one year or less and are taxed as ordinary income.
• Long-Term Capital Gains: Apply to assets held for more than one year and are taxed at 0%, 15%, or 20%, depending on your taxable income and filing status.

Your brokerage will typically send you Form 1099-B, detailing your capital gains and cost basis for tax reporting.

Long-term capital gains tax rates for 2024

Here are the long-term capital gains tax rates for the 2024 tax year based on your filing status:

Tax Rate	Single	Married Filing Jointly	Married Filing Separately	Head of Household
0%	$0 to $47,025	$0 to $94,050	$0 to $47,025	$0 to $63,000
15%	$47,026 to $518,900	$94,051 to $583,750	$47,026 to $291,850	$63,001 to $551,350
20%	$518,901 or more	$583,751 or more	$291,851 or more	$551,351 or more

Cost Basis and Capital Gains Calculation

Your cost basis is the original purchase price of an investment, including fees or commissions. Your capital gain or loss is determined as follows:

Sale Price – Purchase Price (Cost Basis) = Capital Gain or Loss

Capital Losses and Tax Benefits

If you sell an investment at a loss, you incur a capital loss, which can be used to offset capital gains and reduce taxable income. This strategy is known as tax-loss harvesting. However, be mindful of IRS wash sale rules, which prevent claiming losses if you repurchase a “substantially identical” security within 30 days before or after the sale.

Maximum Deduction Limits

If your capital losses exceed your capital gains, you can deduct up to $3,000 per year ($1,500 if married filing separately) from your ordinary income. Excess losses can be carried forward indefinitely.

Taxes on Dividends and Interest Income

• Ordinary Dividends: Taxed as ordinary income.
• Qualified Dividends: Taxed at the lower long-term capital gains tax rates (0%, 15%, or 20%).
• Interest Income: Taxed as ordinary income, except for municipal bonds, which may be tax-exempt.

Your brokerage will issue a 1099-DIV for dividends and a 1099-INT for interest income.

ETFs vs. Mutual Funds: Tax Efficiency

ETFs are generally more tax-efficient than mutual funds due to their unique structure. They avoid triggering taxable events when shares are created or redeemed, reducing capital gains distributions to shareholders.

Net Investment Income Tax (NIIT)

High earners may be subject to an additional 3.8% NIIT on investment income if their modified adjusted gross income (MAGI) exceeds:

• $200,000 (single filers)
• $250,000 (married filing jointly)
• $125,000 (married filing separately)

The NIIT applies to capital gains, dividends, interest, and passive rental income.

Strategies to Reduce Investment Taxes

How to Legally Minimize Capital Gains Tax

• Hold investments for over a year to qualify for lower long-term capital gains rates.
• Time sales in lower-income years to reduce taxable gains.
• Gift appreciated assets to avoid taxes.

Tax-Loss Harvesting

Using capital losses to offset gains can reduce taxable income. If losses exceed gains, deduct up to $3,000 per year and carry over remaining losses.

Tax-Advantaged Accounts

Consider investing in tax-advantaged accounts to shield earnings from taxation:

• Traditional IRA & 401(k): Contributions may be tax-deductible, but withdrawals are taxed as income.
• Roth IRA: Contributions are made with after-tax dollars, but qualified withdrawals are tax-free.
• 529 Plans & HSAs: Offer tax-free growth for education and medical expenses, respectively.

State Taxes on Investments

Some states impose capital gains taxes, while others do not tax investment income. States that do not tax capital gains include:

1. Alaska
2. Florida
3. Nevada
4. New Hampshire (still taxes certain investment income)
5. South Dakota
6. Tennessee
7. Texas
8. Wyoming

FAQs on Investment Taxes

Do I Have to Pay Taxes on Stocks I Don’t Sell?

No, you only owe capital gains tax if you sell an investment. However, you may owe taxes on dividends or interest earned.

How Can I Lower My Investment Tax Bill?

• Hold assets longer to qualify for lower tax rates.
• Use tax-loss harvesting to offset gains.
• Invest in tax-advantaged accounts like 401(k)s, IRAs, and HSAs.

What Are the Long-Term Capital Gains Tax Rates?

0%, 15%, or 20%, depending on your taxable income and filing status.

How to Report Investment Income on Your Tax Return

To accurately report your investment earnings, you’ll need:

• 1099-B: Reports capital gains/losses.
• 1099-DIV: Reports dividend income.
• 1099-INT: Reports interest income.
• Schedule D & Form 8949: Summarizes gains/losses and provides cost basis details.

Final Thoughts

Understanding how investments are taxed can help you make informed financial decisions and minimize your tax burden. Whether selling stocks, earning dividends, or using tax-loss harvesting, strategic tax planning can keep more of your money working for you.

Plus, your partners at PSA CPA are here to help! Give us a  call at 301-879-0600 and we’ll be happy to assist with this process.