If you're one of the millions of Americans who has a day job but also invests some of your income, you qualify as a casual investor. And yes, your investments, like most aspects of your financial life, do have an impact on your taxes .
Whether you're new to investing, spent the year building out your portfolio or are simply saving for retirement through your IRA, it's important to know what to expect come tax time. How your investments affect your tax bill varies depending on several factors. Those factors include your activities over the past year, the size of your portfolio and whether you take the standard deduction or itemize deductions.
If you sold some winning stock in 2018 or experienced losses, here's some basic information that every casual investor should know.
What You Need to File
When you sell investments such as stock or receive income related to your investments, that income will be reported to the Internal Revenue Service on various types of 1099 forms. You will also receive copies of the forms, so you can report the income on your taxes.
You may receive one or more of the following 1099 tax forms:
1099-B: Proceeds from your broker transactions such as selling stocks will be reported on this form. It's used to report capital gains or losses from trades of stocks or other publicly traded securities
1099-DIV: Used to report dividend payments and other distributions
1099-INT: Payers of interest income, such as banks, will send these forms if you receive interest payments for checking, savings, CDs, bonds and other investment accounts.
1099-OID: Used to report original issue discount if you purchased a bond for an amount less than face value.
1099-R: If you had distributions from retirement plans, annuities, pensions and disability payment from qualified plans, you may receive this form.
1099-Consolidated: Compiles relevant 1099 forms reporting income from investments into a single form.
Know the Tax Impact if You Bought or Sold Investments
If you sold capital assets such as stocks in 2018 and were lucky enough to sell them at a gain, you will have a capital gain. The rate at which you are taxed depends on several factors, including whether net capital gains are considered short- or long-term, as well as your income tax bracket .
A short-term investment is any investment that you owned for a year or less and is taxed at your normal income tax rate. Long-term investments are those held for more than a year and are taxed at lower rates than your normal income tax rates. Long-term capital gains rates are 0 percent, 15 percent and 20 percent, based on your income and filing status.
If you have losing stock, you can offset your losses against your gains, reducing the taxes you owe . An overall loss on your investments will give you a net capital loss, which can be deducted from any other income you have up to $3,000. Don't forget, if you have losses of more than $3,000, they can be carried forward to the next tax year.
Understand How Cryptocurrency is Taxed
If you took a dive into trading cryptocurrency, such as Bitcoin, and held on to it as an investment, the IRS will consider it as a capital asset like stock. In this case, your crypto sale will be taxed just as a sale of stock would be, using the sale and cost basis to figure out the gain or loss.
Know How Investments Impact Your Taxes if You Did Not Sell
If you did not sell investments this year, there may still be tax repercussions. Although most casual investors know that they owe taxes on investments they sold, many aren't aware that even if they didn't sell this year, they may see some income from their investments that is taxable.
If you receive dividends from any of the mutual funds, stocks or index funds you own, you will pay taxes on those dividends.
Take Advantage of Retirement Accounts
The 2018 investments in your retirement accounts will help you save money on your taxes, thanks to favorable tax provisions for retirement accounts. For example, you can make a 2018 contribution up to $5,500 ($6,500 if you're age 50 or older) to your IRA up until the April 15 tax deadline and may be able to get a tax deduction on your 2018 taxes. There's also an added bonus. You may also be able to get the saver's credit, worth up to $1,000 if you are single and up to $2,000 for married filing jointly, just for investing in your retirement.
Now that you know the basic tax implications of your investments, you can be ready for tax time with these money-saving tips .
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