Brokerage accounts are taxed on the money you make, not the money you invest

When you buy a stock or fund in a brokerage account and sell it for more than you paid, that profit is taxable income. When a company pays you a dividend, that is taxable income. When a bond pays interest, that is taxable income. The money you put in—your original investment—is not taxed again. The tax bill comes from the gains and the payouts.

The amount you owe depends on three things: how long you held the investment before selling, what type of income it generated, and your total income for the year. A profit you make after holding something for less than a year is taxed as ordinary income, the same rate as your salary. A profit after holding for more than a year gets a lower rate, called the long-term capital gains rate. Dividends and interest are taxed at different rates depending on whether they come from may have access to sources.

You report these gains and losses on your tax return each year, and you owe tax on the net result—gains minus losses. The brokerage sends you a form called a 1099-B (for sales) and a 1099-DIV (for dividends) that shows what you made. You do not pay tax when you buy or when you hold; you pay when you sell or when you receive a payout.

Key Takeaways

  • Profits from selling investments held less than one year are taxed as ordinary income at your regular tax rate; profits from sales after one year may have access to for lower long-term capital gains rates.
  • Dividends and interest are taxed in the year you receive them, even if you reinvest the money back into the account.
  • You can reduce your tax bill by selling losing positions to offset winning ones, a strategy called tax-loss harvesting.
  • The brokerage reports your sales and dividends to the IRS on forms 1099-B and 1099-DIV, which you use to fill out your tax return.
  • State and local taxes may also explore to your investment income, depending on where you live.

Short-term versus long-term capital gains rates

A capital gain is the profit you make when you sell an investment for more than you paid for it. The tax rate depends on how long you owned it. If you held it for one year or less, it is a short-term gain and is taxed as ordinary income—at the same rate as your wages or salary. If you held it for more than one year, it is a long-term gain and gets a preferential rate.

Long-term capital gains rates are 0%, 15%, or 20%, depending on your total income for the year. These rates are lower than ordinary income rates for most people. For example, if you are in the 24% ordinary income bracket and you sell a stock you held for two years, your profit may be taxed at 15% instead. The exact rate depends on your filing status and total income, not on the size of the gain itself.

The holding period starts the day after you buy and ends the day you sell. If you buy on January 15 and sell on January 15 of the next year, that is exactly one year and qualifies for long-term treatment. If you sell on January 14, it is short-term. This matters because the difference between short-term and long-term rates can be substantial—sometimes 9 percentage points or more.

How dividends and interest are taxed

Dividends are payments a company makes to shareholders, usually from profits. Interest is what a bond or savings vehicle pays you for lending money. Both are taxed in the year you receive them, regardless of whether you reinvest the money or take it as cash.

may have access to dividends—those paid by U.S. corporations or certain foreign corporations on stocks you held for at least 60 days—are taxed at the same preferential rates as long-term capital gains: 0%, 15%, or 20%. Non-may have access to dividends are taxed as ordinary income. Most dividends from large U.S. companies are may have access to; your brokerage statement will tell you which are which.

Interest from bonds, bond funds, and money market funds is always taxed as ordinary income, at your full tax rate. If you own a municipal bond, the interest may be exempt from federal tax and sometimes state tax, but that is a feature of the bond itself, not the brokerage account. The account does not shield you from tax; it just holds the investments.

Capital losses and tax-loss harvesting

When you sell an investment for less than you paid, you have a capital loss. You can use losses to offset gains. If you sold one stock for a $5,000 gain and another for a $2,000 loss, your net gain is $3,000 and you owe tax on $3,000, not $5,000.

If your losses exceed your gains in a year, you can deduct up to $3,000 of the net loss against your ordinary income. Any loss beyond that carries forward to future years. This means a bad year in the market can reduce your tax bill not just by offsetting gains, but by reducing your taxable income overall.

Tax-loss harvesting is the practice of selling a losing position specifically to capture the loss for tax purposes, then buying a similar (but not identical) investment to stay in the market. For example, you might sell a fund that has lost value and when ready buy a different fund in the same category. The IRS has a rule called the wash-sale rule that prevents you from buying back the same or a substantially identical investment within 30 days before or after the sale, or you lose the tax benefit. The rule applies to the specific security, not the category, so switching funds usually works.

What forms the brokerage sends and how to use them

Your brokerage sends you a 1099-B form by January 31 that lists every sale you made during the year: the security, the date you bought it, the date you sold it, what you paid, what you sold it for, and the gain or loss. This form goes to the IRS as well, so your tax return must match it. If you sold 50 times, the 1099-B lists all 50 transactions.

Your brokerage also sends a 1099-DIV that shows dividends and distributions you received. It breaks them down by type: ordinary dividends, may have access to dividends, capital gain distributions, and others. You use this to fill out Schedule D (for capital gains and losses) and Schedule B (for dividends and interest) on your tax return.

If you have losses, you report them on Schedule D as well. The IRS matches your return against the 1099 forms, so if you omit a gain or misreport a loss, the IRS will likely catch it. You do not need to send the forms with your return, but you should keep them for your records.

State and local taxes on investment income

Federal tax is not the only tax on brokerage account gains. Most states tax capital gains and dividends as ordinary income. A few states—including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—do not tax income at all. Others tax capital gains at a different rate than ordinary income, or only tax gains above a certain threshold.

Some cities and counties also impose local income tax. New York City, for example, taxes investment income the same way it taxes wages. If you live in a state or city with income tax, your brokerage gains are subject to it. You report state and local taxes on your state return, not your federal return, and the rules vary by location.

If you move during the year, you may owe tax to both your old state and your new state, depending on when you moved and what you sold. This is one reason to track the dates of your sales carefully.

How wash-sale rules affect your tax strategy

The wash-sale rule exists to prevent you from claiming a loss and then when ready buying back the same investment. If you sell a stock at a loss and buy it back (or buy a call option on it, or buy a substantially identical stock) within 30 days before or after the sale, the loss is disallowed. Instead, the loss is added to the cost basis of the new purchase, deferring the tax benefit to a future sale.

The rule applies to the specific security, not the asset class. You can sell a total stock market index fund at a loss and buy a different total stock market index fund the same day without triggering the wash-sale rule, because they are not substantially identical. You cannot sell Apple stock at a loss and buy Apple stock back within the window. You also cannot buy call options on Apple within the window, because options on the same security count as substantially identical.

The 30-day window runs from 30 days before the sale through 30 days after. If you sell on March 15, the window is February 13 through April 14. Any purchase in that range triggers the rule. This matters for tax-loss harvesting: if you want to harvest a loss in December, you need to wait until January 30 to buy back a similar investment, or the loss will be deferred.

Frequently Asked Questions

Do I owe tax on unrealized gains while I still own the investment?

No. You owe tax only when you sell or when you receive a payout like a dividend. If you buy a stock for $100 and it rises to $150 but you do not sell, you owe nothing. The gain becomes taxable only when you sell it or when the company pays you a dividend.

What if I have more losses than gains in a year?

You can deduct up to $3,000 of net losses against your ordinary income in that year. Any losses beyond $3,000 carry forward to future years and can be used to offset future gains or deducted at $3,000 per year until exhausted. This means a down year can reduce your tax bill for years to come.

Are gains in a Roth IRA or 401(k) taxed?

No. Retirement accounts like Roth IRAs and 401(k)s are tax-sheltered, meaning gains, dividends, and interest inside them are not taxed. A regular brokerage account has no such shelter. This is why retirement accounts are often used first for long-term investing.

Do I have to report every single trade to the IRS?

No. You report the net result on Schedule D: total gains, total losses, and the net. The IRS receives the detailed 1099-B from your brokerage, but you summarize it on your return. If you had 100 trades, you do not list all 100; you report the totals.

What happens if I do not report a gain the brokerage reported on the 1099-B?

The IRS will likely send you a notice. The IRS matches tax returns against 1099 forms automatically. If your return does not include a gain the 1099-B shows, the IRS will either assess the tax and send you a bill, or ask you to explain the discrepancy. It is best to report all gains and losses accurately.