When it comes to investing there’s a lot to learn about the types of investments and different investment strategies—and it can be overwhelming. From mutual funds to IRAs, 401ks, stocks, and bonds, there’s a lot of information to understand.
As you begin assessing your risk and setting up your investment strategy, you’ll also need to plan for the tax implications of your strategy. Understanding how your investments will be taxed will allow you to be better prepared when tax season rolls around and to make smarter decisions about your investment strategy.
Before we get into it, we just want to say up front that we don’t provide tax advice. We can outline a few tax guidelines that you should pay attention to, but to fully understand the implications, you’ll want to consult a tax professional.
When Do You Pay Taxes on Stocks?
There are several scenarios in which you may be responsible for paying taxes on the stocks you hold in an investment account. The scenario most people are aware of is when you sell a stock that has appreciated in value since you purchased it. The difference in value is referred to as a capital gain. When you have capital gains, you will be required to pay taxes on those earnings.
On the other hand, put simply, if you sell a stock for less than you purchased it for, the difference is called a capital loss. You can deduct your capital losses from your capital gains each year, which will hopefully offset the amount in taxes you owe on your capital gains.
Additionally, you may have taxes related to your stock investments even when you don’t sell. You may receive periodic dividends from some of your stocks when the company you’ve invested in earns a profit. If the dividends you earn add up to a large amount, you may be required to pay taxes on those earnings. Each year, you will receive a 1099-DIV tax form for each stock or investment that you received dividends from. These forms will help you determine how much in taxes you owe.
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When Do I Not Have to Pay Taxes on Stocks?
Again, this should first and foremost be a discussion you have with your tax professional. But there are a few situations you should know about where you often don’t pay taxes when selling a stock. For example, if you are investing through a tax-deferred retirement investment account like an IRA or a 401(k), you won’t have to pay taxes on any gains when you buy and sell stocks inside the account. However, if you were to sell stock in one of these accounts and then withdraw it before your retirement, the amount you withdrew may be taxed as income.
Consider Working with a Professional
The tax implications of your investments will vary depending on stocks you own and the accounts you use, among other factors. That’s why it may be worthwhile to work with an experienced accountant and a financial advisor who can help you understand and manage the complexities of different tax scenarios.
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