Do You Pay Taxes on Investments? What You Need to Know (2024)

Written by a TurboTax Expert • Reviewed by a TurboTax CPAUpdated for Tax Year 2023 • October 19, 2023 8:10 AM


As you start to diversify your financial portfolio, you'll likely look into investing. But do you pay taxes on investments? How much should you plan to account for? Our guide outlines some important points you need to know so you can invest with peace of mind.

Do You Pay Taxes on Investments? What You Need to Know (5)

Investing and taxes

Investing can be a great way to grow your assets, but what do you need to know when it comes time to file your taxes? Like most tax questions, the answer depends on your specific situation.

There are typically two times when your taxes are affected by your investments.

  1. The first is when you receive income from the investments.
  2. The second is when you sell the investments for a gain or loss.

Of course, there are possible exceptions and TurboTax can help you identify if any of these situations apply to you when you're completing your tax return.

Income from investments

Often, investment income includes interest and dividends. The income you receive from interest and unqualified dividends are generally taxed at your ordinary income tax rate. Certain dividends, on the other hand, can receive special tax treatment, which are usually taxed at lower long-term capital gains tax rates. Your investment brokerage company should provide information about whether your dividends are qualified or not.

Gains and losses from investment sales

You typically only have to pay taxes on the sale of investments when you receive a gain. To figure this out, you have to subtract the cost basis of your investment, which is normally what you paid, from the sale price to see if you had a gain or a loss.

  • If you have a gain on the sale, you'll have to see if you owe taxes.
  • If there's a loss, you may be able to offset other realized gains or take a deduction depending on your situation.

To qualify, you must first be selling a capital asset. Common examples of capital assets include:

  • investments such as stocks or bonds
  • your home
  • other property

There are two general types of capital gains- short-term and long-term. Short-term capital gains are for capital assets you hold for a year or less. These gains are usually taxed at your ordinary income tax rate. Long-term capital gains are for capital assets you hold for more than a year. The long-term capital gains tax rates are typically lower than your ordinary income tax rate and generally max out at 20%.

Certain types of investments have higher capital gains tax rates. The most notable exception is collectibles, such as rare stamps, coins, art and more. These types of investments typically have a long-term capital gains tax rate of 28%.

In addition to the income taxes described above, those with significant income may be subject to thenet investment income tax, which is an additional 3.8% tax on top of the usual capital gains taxes.

Thankfully, you can offset your capital gains with your capital losses if you have any. Like with capital gains, there are both long-term and short-term capital losses. Offsetting your capital gains with your capital losses can seem a bit overwhelming, but here's how it works.

  • First you net your capital gains and capital losses of the same kind. That means subtracting short-term capital losses from short-term capital gains and long-term capital losses from long-term capital gains.
  • If you end up having a short-term or long-term capital loss remaining, you can then reduce your short-term losses with your long-term gains or vice versa.
  • If you still have more capital losses than capital gains in a year, most filing statuses can use up to $3,000 of any capital losses remaining to offset your ordinary income.
  • Any excess capital losses above the $3,000 amount can be carried over to future tax years to offset future income according to the rules above.

As long as you continue using TurboTax each year to file your taxes, TurboTax can keep track of any carry-forward losses and apply them to your future tax returns.

Certain investments may have special tax treatment

Certain types of investments can have special tax treatment. For instance, municipal bonds are normally tax-free for federal income taxes but may be taxable on your state tax return, depending on the state you live in and the state that issued the bond you invested in.

  • It's also possible to trigger special taxes, such as the alternative minimum tax (AMT) or the Net Investment Income Tax (NIIT). TurboTax can guide you through the process of figuring out if this applies to your situation or not.
  • A big exception to the normal taxation of investments is money in tax-advantaged retirement accounts. Traditional retirement accounts, such as a traditional IRA or traditional 401(k), may allow you to take a tax deduction today for money that you invest. Then, the investments within the account can grow tax-free. When you withdraw the money in retirement after meeting the age requirements, the money typically counts as ordinary income and you will likely have to pay ordinary income taxes on this income.
  • The other main type of tax-advantaged retirement accounts that are treated differently are Roth retirement accounts, such as a Roth IRA or Roth 401(k). You don't get a tax deduction for contributing to these accounts but the money can grow tax-free and you can withdraw it tax-free, including the investment gains, in retirement.

There may be other exceptions depending on your specific investments and circ*mstances as well. TurboTax can help you navigate these more complex areas.

Types of investments tax software can help with

With TurboTax software, figuring out what taxes you owe on your investments is straightforward. We’ll ask you simple questions about your investments, you can easily import your information, and we’ll search over 400 tax deductions to make sure you get every credit and deduction you qualify for.

With TurboTax, figuring out what taxes you owe on your investments is straightforward. Here are some of the most common types of investments TurboTax can help with:

  • Stocks
  • Bonds including municipal bonds
  • Mutual funds
  • Exchange-traded funds (ETFs)
  • Restricted stock units (RSUs)
  • Stock options
  • Real estate investment trusts (REITs)
  • Rental real estate
  • Sale of a home
  • Cryptocurrency
  • Investments within a retirement account
  • Collectibles including rare stamps, coins, art and more

Let a local tax expert matched to your unique situation get your taxes done 100% right with TurboTax Live Full Service. Your expert will uncover industry-specific deductions for more tax breaks and file your taxes for you. Backed by our Full Service Guarantee.

You can also file taxes on your own with TurboTax Premium. We’ll search over 500 deductions and credits so you don’t miss a thing.

Do You Pay Taxes on Investments? What You Need to Know (2024)


Do You Pay Taxes on Investments? What You Need to Know? ›

Capital gains, dividends, and interest income

Do you have to pay taxes on investments? ›

Gains and losses from investment sales. You typically only have to pay taxes on the sale of investments when you receive a gain. To figure this out, you have to subtract the cost basis of your investment, which is normally what you paid, from the sale price to see if you had a gain or a loss.

What investments do you need to report on taxes? ›

The things that qualify for investment property in the IRS include stocks, bonds, mutual funds, even some real estate. If the worth of that investment does go up over time, you may decide to sell it. The amount of money you make on that investment beyond your basis is your profit.

Do I need to pay estimated taxes on investment income? ›

Capital gains, interest, and dividends from investments

Similarly, it may be necessary for you to make estimated tax payments on investment income. You can use the Qualified Dividends and Capital Gains Worksheet” available in IRS Publication 505 to estimate the additional tax liability.

How to calculate taxes on investments? ›

How to calculate capital gains tax — step-by-step
  1. Determine your basis. ...
  2. Determine your realized amount. ...
  3. Subtract your basis (what you paid) from the realized amount (how much you sold it for) to determine the difference. ...
  4. Review the descriptions in the section below to know which tax rate may apply to your capital gains.

How do I avoid paying taxes on my investment account? ›

9 Ways to Avoid Capital Gains Taxes on Stocks
  1. Invest for the Long Term. ...
  2. Contribute to Your Retirement Accounts. ...
  3. Pick Your Cost Basis. ...
  4. Lower Your Tax Bracket. ...
  5. Harvest Losses to Offset Gains. ...
  6. Move to a Tax-Friendly State. ...
  7. Donate Stock to Charity. ...
  8. Invest in an Opportunity Zone.
Mar 6, 2024

How much tax will I pay on my investments? ›

What is the Capital Gains Tax rate? The amount of tax you're charged depends on which income tax band you fall into. Basic-rate taxpayers are charged 10% on their realised profits, while higher-rate (and additional rate) taxpayers must pay 20%.

What investment is not subject to income taxes? ›

Interest income that may be exempt from federal tax, includes: Municipal bond interest. Private activity bonds. Exempt-interest dividends (for example, from a mutual fund that invests in municipal bonds)

Does the IRS check investments? ›

For capital assets, like stocks or real estate, you are required to maintain the records necessary to show their original cost basis. If the IRS has reason to believe that your taxes are inaccurate or incomplete, it may conduct an audit.

Does investment income count as earned income? ›

Earned income may include wages, salary, tips, bonuses, and commissions. Income derived from investments and government benefit programs would not be considered earned income. Earned income is taxed differently from unearned income.

Do I have to report investment money? ›

While all capital gains are taxable and must be reported on your tax return, only capital losses on investment or business property are deductible.

What does the IRS consider investment income? ›

In general, net investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, and non-qualified annuities.

Do I need investment statements for taxes? ›

Keep good records.

For investments outside of a tax-favored retirement account, you usually need to report details of any interest, dividends, and capital gains and losses. In most cases, you'll receive a 1099 with this information from your financial institution.

How much investment income is tax free? ›

Investment income may also be subject to an additional 3.8% tax if you're above a certain income threshold. In general, if your modified adjusted gross income is more than $200,000 (single filers) or $250,000 (married filing jointly), you may owe the tax. (These limits aren't currently indexed for inflation.)

Do you have to pay taxes on money withdrawn from an investment account? ›

But you will need to pay ordinary income taxes on any money you withdraw from the account in the year you take the distribution. Individuals who think they may be in a lower tax bracket in retirement prefer to use traditional retirement accounts.

How to avoid net investment income tax? ›

How do you avoid the net investment income tax? You can avoid the net investment income tax by keeping your MAGI below $200,000 for single filers, $250,000 for those married filing jointly or $125,000 for those married filing separately. But that doesn't mean you have to make less money.

Are some investments tax free? ›

Although tax-exempt mutual funds usually produce lower yields, you generally don't have to pay federal taxes on earnings from tax-exempt money market and bond funds. And you can save even more if you live in a state that offers similar exemptions.

How do rich avoid taxes on investments? ›

Billionaires (usually) don't sell valuable stock. So how do they afford the daily expenses of life, whether it's a new pleasure boat or a social media company? They borrow against their stock. This revolving door of credit allows them to buy what they want without incurring a capital gains tax.

Do you need to report investments if you didn't sell? ›

You don't report income until you sell the stock. Your overall basis doesn't change as a result of a stock split, but your per share basis changes. You'll need to adjust your basis per share of the stock. For example, you own 100 shares of stock in a corporation with a $15 per share basis for a total basis of $1,500.


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