Investing and Taxes: What you need to know

Do you pay taxes when you sell a stock or bond?

Investing in stocks and bonds can be a great opportunity to build your wealth over time, and it is important to be aware of the tax consequences of investing in these securities so that you can grow your net worth in the most tax-efficient way. The first thing to understand in regards to selling stocks or bonds is that you do not pay capital gains taxes until you sell the stock or bond. Another important concept to be aware of is that you pay capital gains tax on the difference between your purchase price of the asset and what you eventually sell it for. As an example, if you purchased Stock A for $500 and sold it later on for $1,000, you would have a capital gain of $500 to pay taxes on. Conversely, if you only sold the stock for $300 you would have a capital loss of $200 which reduces your tax bill. The actual tax rate that applies to the capital gain or loss is dependent on your holding period, which will be discussed in detail below.

Long-Term Vs Short-Term Capital Gains

The holding period of the security that you sell has a big impact on the way that it is taxed. Short-term capital gain tax rates apply to any securities that are held for 1 year or less. Short-term capital gains are taxed at the same rates as all of your other income, at rates ranging from 10% up to 37%, depending on your marginal tax rate. Long-term capital gains tax rates apply to any securities that are held for over 1 year. These rates are much more favorable and range from 0% up to 20%. Because of this difference between the short-term and long-term tax rates, it makes sense to hold stocks and bonds for over one year when selling for a gain if possible.

How are Dividends and Interest Taxed?

Many stocks pay out dividends to their investors, and bonds will pay interest. Interest is taxed in the year that it is received at ordinary income tax rates. Certain types of interest income, such as interest from municipal bonds, is tax-free. Ordinary dividends are also taxed at ordinary income tax rates in the year that they are received. Qualified dividends, which are dividends on stocks that meet certain holding period requirements, are taxed at the lower long-term capital gains tax rates.

How is Crypto Taxed?

Cryptocurrencies are taxed in the exact same way that stocks are from a capital gains perspective. You will have a capital gain or loss based on the difference between the price you purchased the cryptocurrency for and the price that you eventually end up selling it for. This gain or loss is then taxed at either short-term or long-term capital gains tax rates, the same as stocks are.

What Tax Forms Should I Receive?

The good news is that you don’t have to track dividends, interest, and capital gains by yourself. Whatever brokerage you use will provide you with either a 1099-INT, 1099-DIV, or Consolidated Form 1099 at the end of the year that will provide you with all of this information. You will then use these forms to prepare your tax return or provide these forms to your CPA so that they can prepare your tax return.