The answers you’re looking for this tax season

How are taxable brokerage accounts different from IRAs and other retirement accounts?

Taxable brokerage accounts can take on many forms of ownership. They can be owned individually, jointly with a partner, or even by a trust or an organization. In these accounts, you invest cash you've already paid taxes on, such as money from your paycheck. However, you may still owe taxes on future growth or income from these investments.

Traditional and Roth IRAs, as well as retirement plans like 401(k)s, are geared toward long-term saving and investing, so they receive special tax treatment. Your contributions are either tax-deferred—meaning you won't owe income tax until you take a distribution—or after-tax—meaning you've already paid taxes on the money you're contributing, so your qualified distributions are tax-free.*

What's capital gains tax and when do I pay it?

Capital gains tax is a fee the government charges on the profit of the sale of an investment. In other words, if you sell an investment for more than you paid for it, you'll owe capital gains tax on your earnings. Unless you're required to make estimated tax payments, you'll pay capital gains tax when you file your income tax return.
 

Let's look at an example:

An investor buys 1 share of ABC Company for $10 in her taxable brokerage account. She later sells that share for $15. The result is a realized capital gain of $5. The investor only owes capital gains tax on the $5 profit, not the entire $15. The original $10 is considered her "basis"—the original amount invested.

What do realized and unrealized mean?

You "realize" capital gains when you sell an investment in your taxable brokerage account for more than you paid for it. If your investment has increased in value and you haven't sold it, your gain is considered "unrealized." You won't owe capital gains tax on unrealized gains.

Does it matter how long I own the investment?

Yes, the holding period matters. Investors who own their investment for 1 year or more before selling at a gain are subject to long-term capital gains tax rates. Investors who own their investment for less than a year before selling at a gain are taxed at short-term capital gains rates. 

To encourage long-term investing, long-term capital gains receive special tax treatment. Most individuals are taxed 15% on their realized long-term capital gains. Investors subject to short-term capital gains rates are taxed at their ordinary income tax rate, which is often higher than 15%.

What if I have more losses than gains?

If you sell your investment for less than you originally paid for it, you could be entitled to take a capital loss. Capital losses are the opposite of capital gains. When an investment is sold for less than its original purchase price, the difference in value is considered a capital loss. While we never want our investments to lose value, investors who realize a capital loss in their taxable brokerage accounts can potentially use that loss to lower their taxable income or offset future capital gains.

The income tax code is complicated, but don't be discouraged. If you need some help or are interested in learning more, take a moment to look through the articles and resources featured on our tax page. And as always, we encourage all our clients to seek guidance from qualified tax professionals when needed.