Earned money in your brokerage account? Here’s what you need to know about your taxes
If you are sitting on the profits of selling investments, read this carefully.
- Investing money that you don’t need for immediate use is a good way to grow your wealth.
- Selling stocks for a profit can reduce tax implications, and it’s important to know what income to report.
Money you have set aside for emergency expenses should be placed in a savings account. But for cash that you don’t need in an emergency and don’t plan to use for many years, a brokerage account is a great home.
The benefit of investing your money in a brokerage account is having the ability to grow it into a much larger sum over time. And while there are risks, the returns from your brokerage account may well exceed the interest you receive in your savings account.
If you made money in your brokerage account last year, it could impact your 2021 tax return, which you’ll need to submit by the April 18 filing deadline of this year. Here’s what you need to know.
You may or may not owe the IRS money
The value of your brokerage account balance may have increased in 2021 because you added money and investments to your account, or because your investments increased in value. If your portfolio has gone up in value but you haven’t sold any stocks, you won’t owe the IRS any money. Instead, you are only required to pay IRS capital gains taxes, which come into play when you sell an asset like a stock or bond for more than you paid. .
Let’s say your brokerage account balance was $3,000 at the start of 2021 and you did nothing during the year, but sit back and watch it grow. If, at the end of 2021, your balance was $3,200, solely due to capital appreciation and no stock sales, this creates no tax liability for you.
On the other hand, if you sell 10 shares of a stock you bought for $50 each at $70 each, you are looking at a gain of $20 per share, or a total gain of $200. That $200 gain is something you will need to report to the IRS and possibly pay taxes.
How to know what brokerage income to declare
It’s not just capital gains that you have to report to the IRS. You will also need to tell the IRS if you earned income in the form of interest payments or dividends.
Fortunately, your brokerage account should allow you to easily transmit this information, as well as capital gains information. Indeed, brokerages are required to provide account holders with tax forms that touch on all of these areas. Here are some specific forms to look for, whether by mail, email, or logging into your account:
- Form 1099-Bthat you will use to report capital gains
- Form 1099-INT, that you will use to report interest income from bonds (you may also receive this form from your bank to report interest earned on a savings account or CD)
- From 1099-DIVyou will use to declare dividends
All told, there’s really no need to worry about what information you need to provide to the IRS, as your brokerage account should put it together perfectly for you. It’s a simple matter of copying the correct details into your tax return.
That said, if you are considering a substantial amount of capital gains, you may want to consult with a tax professional before filing your return. You should also be aware that if you sold assets at a loss last year, you may be able to use that loss to offset your gains, so don’t assume you’re going to write a massive check to the IRS.
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