As your investments become more complex, so do your taxes. Although trading stocks is a great way to earn additional income, you typically need to report these earnings when tax season rolls around. Learn the basics of reporting stock earnings on your taxes.
Earning Income on Stocks
When you buy and sell stocks, you have the potential to earn money. For example, if the price of the shares you own increases over time, you could sell this stock and cash out. These profits on buying or selling your investments are called capital gains. They’re taxed differently depending on if they are considered a short-term or long-term holding.
Likewise, you can earn an income through interest and dividends. Dividends are periodic payments you may receive as a shareholder of a company. Along with these stock earnings, you can earn money through interest on bonds or mutual funds.
When You Need to Report Stock Earnings
Whenever you make a profit on capital gains, interest, and dividends, you need to report these on your taxes. The amount you owe depends on what kind of investment income you made, how long you owned your assets, and how much you earned within the year.
When making capital gains versus dividend income, you pay different rates. Capital gains tend to be taxed less while dividends are usually taxed at your normal tax rate. However, qualified dividends are usually taxed at rates similar to capital gains.
There are some exemptions with paying taxes on stock earnings. If you earn any income through a qualified retirement account, like an IRA or a 401k, you do not have to pay taxes until you withdraw these funds later in life. Likewise, there are also income thresholds for owing taxes:
- Lower than $39,375 or $78,750 for married couples pay zero in capital gains.
- Income between $39,376 to $434,550 pay 15% in capital gains.
- Income higher than $434,551 pay 20% in capital gains.
How to Report Stock Earnings
When your stocks earn money, follow these steps to report them on your taxes:
- Collect your 1099 forms. At the end of each year, your financial services firm sends you a Form 1099-B. It includes information about your earnings. If you traded with multiple firms, you get multiple tax forms. Wait until you receive all of your forms before filing your taxes.
- Separate your short-term and long-term holdings. Since they are taxed at different rates, it’s important to differentiate the two. Short-term holdings are held for a year or less, and long-term holdings are anything longer than that.
- Find additional information. If you’re missing any information on you 1099 forms, such as cost basis and date of purchase, search your records for it.
- Fill out Form 8949. This form is for reporting sales and exchanges of capital assets. You will need to transfer some of this information to Form 1040, which is your individual tax return, per IRS directions.
- Fill out state tax forms. The requirements vary per state. Check with your state’s tax laws to find out what forms you need to file.
In order to keep your assets safe and follow state and federal laws, it’s important that you are properly reporting your stock earnings on taxes. Hiring a financial adviser or accountant is wise as your finances become more complex.
You must be logged in to post a comment.