Investing may be an excellent way to increase your assets, but what must you know when it’s time to file your taxes? Like many tax questions, the answer depends on your specific circumstance.

There are usually two times when your taxes are affected by your investments. The first is when you get income from the investments. The second is when you sell the investments for a loss or gain.

Of course, there are some exceptions and an advisor that specializes in Denver business taxes can help you identify if any of these circumstances apply to you when you’re doing your taxes.

Investment income includes dividends and interest. The income you get from unqualified dividends and interest is usually taxed at your normal income tax rate. Certain dividends can get special tax treatment, which are typically taxed at lower long-term capital gains tax rates. 

Losses and Gains from Investment Sales

You usually only must pay taxes on an investment sale when you earn a gain. To calculate this, you need to subtract the cost basis of your investment, which is what you paid, from the sale price to know if you had a loss or a gain.

If you have a gain on the sale, you’ll need to find out if you owe taxes. If there’s a loss, you might be able to offset other realized gains or take a deduction based on your situation. To qualify, you must first sell a capital asset. Examples of capital assets include:

  • Stocks or bonds 
  • Your house
  • Other property

The two general types of capital gains are long-term and short-term.  Short-term capital gains are assets you have for 12 months or less. These gains are typically taxed at your normal tax rate. Long-term capital gains are assets you have for over 12 months. The long-term capital gains tax rates are usually lower than your normal income tax rate. 

Certain types of investments have higher capital gains tax rates. The most important exception is collectibles like coins, art, rare stamps, and more. 

In addition, those with substantial income could be subject to the net investment income tax, which is an additional tax on top of the standard capital gains taxes. Any extra capital losses over $3,000 might be carried over to future tax years to counterbalance future income.

If you hire a Denver tax professional to do your taxes, they can keep track of your losses and use them on your future tax returns.

Certain Investments Might Have Special Tax Treatment

Certain types of investments can have special tax treatment. For example, municipal bonds are usually tax-free for federal income taxes but could be taxable on your state tax return, contingent on the state that issued you the bond and in which state you live.

It’s also possible to activate special taxes, like the Net Investment Income Tax (NIIT) or the alternative minimum tax (AMT). A tax professional can lead you through the process of deciding if this applies to your circumstances or not.

Important Tax Considerations

Capital gains signify a rise in the value of an asset like a bond or a stock. If the investor sells the asset, it generates a capital gain which is taxable. If the asset stays unsold, then the capital gain is unrealized, and the tax is deferred. The situation for taxing capital gains and other investment income types differs.

Dividend Taxes

Whether they’re qualified dividends or ordinary dividends, these assets can be taxed in a couple of different ways.

What is a qualified dividend? A dividend paid by domestic businesses and a dividend paid by foreign businesses are taxed and qualified at the preferred tax rate. However, distributions paid by master limited partnerships, real estate investment trusts, and other entities may not qualify for favored tax status. Also, dividends paid on shares that aren’t kept at least 61 days in the 121 days near the ex-dividend date aren’t qualified dividends.

Standard dividends are payments a public company makes to holders of its common stock shares. A qualified dividend is a standard dividend reported to the IRS as a capital gain instead of income. It also satisfies the criteria to be taxed at capital gains tax rates, which are lesser than income tax rates for some taxpayers. However, qualified dividends must meet special requirements issued by the IRS.

To reduce your tax rate on income, you may want to think about owning investments that pay qualified dividends. These dividends are federally taxable at the capital gains rate, which is based on the investor’s taxable income and changed adjusted gross income (AGI).

How a dividend is taxed is vital when considering cash flow investments. Interest from bonds, bank CDs, and money markets are taxed at normal tax rates. This means a tax filer in the top-tier tax bracket pays a certain percentage of taxes on interest payments. If you compare that to the maximum tax percentage on qualified dividends, the “after-tax” returns are considerably better with dividends.

Generally, qualified dividends get more favorable treatment at a lesser tax rate. Normal stock needs to be kept for over 60 days during the four months starting two months before the stock’s ex-dividend date. The ex-dividend date is when the price of the stock is altered lower to factor in the dividend. For preferred stock, the dividend is qualified if you keep it for over three months in the six months that start three months before the ex-dividend date.

Qualified dividends are taxed at rates of zero, 15, and 20 percent, contingent on the income of the tax filer. Moreover, unlike unrealized capital gains that don’t generate a tax liability, if dividends are in a taxable account, they are taxable for the tax year they’re received. Dividends in tax-advantaged accounts such as a 401 (k) or an IRA don’t generate a tax liability in the year they’re received.

Capital Gains Taxes

Realized capital gains are also handled in a few different ways, according to how long the asset was held and the amount of income of the investor.

Capital gains (long-term) tax rates are usually lower than tax rates for standard income. The tax rate percentage for capital gains is zero, 15, and 20 percent, based on the investor’s total taxable income. 

The capital gains tax rates are extremely advantageous. For instance, a married couple filing jointly has a zero percent capital gains tax rate if their taxable income is up to $89,250 in 2024. 

It’s critical to note that investors can write off losses from their investments and can offset their gains with any losses. Referred to as tax-loss harvesting, this method can save investors substantial money when they must pay taxes.

Taxes on Interest Income

Interest income is usually taxed as regular income, signifying it’s subject to the same federal tax rate as your income. This pertains to interest earned from savings accounts, certificates of deposit, and bonds. However, interest from state-issued municipal bonds could be tax-exempt if issued in your home state.

Whether interest income is tax-exempt or taxable, it must be documented on your tax return with Form 1099-INT. Interest made on tax-deferred accounts like 401(k)s or Roth IRA doesn’t need reporting until you use the funds.

Net Investment Income Tax

Income from capital gains, dividends, and other comparable forms of income could have an additional surcharge referred to as an investment income tax. The taxation of this surcharge is based on the investor’s filing status and income.

Tax-Free Capital Gains and Dividends

The primary way to avert taxes on your capital gains and dividend income is to own them in tax-advantaged accounts like an IRA (including a Roth IRA) or a 401(k). Moreover, an investor can keep appreciated stock forever and never pay any capital gains tax.

Two ways investors can make money on their investments are investment income and capital gains. They’re handled differently for tax purposes. Therefore, it makes sense for investors to know which method of making money works better for their financial situation.

Types of Investments a Tax Advisor Can Help With

With professional tax advisors, determining what taxes you owe on your investments is straightforward. They’ll ask you questions about your investments, and search over the numerous tax deductions to ensure you get every deduction and credit and deduction you qualify for. Here are some common types of investments:

  • Stocks and stock options
  • Real estate rental
  • Cryptocurrency
  • Investments in a retirement account
  • Restricted stock units (RSUs)
  • Collectibles like coins, art, rare stamps, and more
  • Real estate investment trusts (REITs)
  • Bonds
  • Sale of a home
  • Mutual funds
  • Exchange-traded funds (ETFs)

Let our Denver tax experts who are knowledgeable and experienced with investments and taxes fill out your tax forms correctly.

Get Help When Things Get Too Complicated

Knowing what investments must be taxed can be more difficult to calculate and report than others, so you might need to consult an investment tax expert to correctly calculate your loss or gain. Contact us today if you have questions and one of our Denver tax professionals is ready to assist.