Financial Planning
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Investors who hold assets in taxable accounts—as opposed to tax-favored retirement accounts such as IRAs or 401(k)s—are typically eligible for favorable tax rates on investment income such as capital gains and many dividends.
With these rules, details matter. The difference between a 15% and a 24% tax rate on a capital gain can come down to holding it one day longer. Selling losers to offset gains from winners can also reduce taxable gains for the year—if the investor remembers to.
Here are key tax considerations for investors (also see IRS Publication 550).
When an investor sells an asset held in a taxable account, the result is a capital gain or loss. The gain or loss is the difference between the investment’s original cost (plus adjustments) and the selling price.
Example: If an investor buys shares for $8 each and sells them for $12, the capital gain is $4 each. Conversely, if a share is sold for $6, the capital loss is $2.
Offsetting
Capital losses can offset capital gains. If the investor in the example above sells both shares in the same year, the $4 gain and $2 loss are combined and the result is a taxable capital gain of $2.
If losses exceed gains, up to $3,000 of net losses can offset ordinary income (such as wages) a year. Unused capital losses can be carried forward to reduce future capital gains and ordinary income of up to $3,000 each year.
Rates on long- and short-term capital gains
Profits on sales of investments held for more than a year are long-term capital gains, and they are taxed at 0%, 15%, or 20%, depending on the investor’s taxable income.
Profits or losses on investments held for a year or less are short-term gains and losses. They are taxed at the same rates as ordinary income such as wages, which are higher than the rates on long-term gains. This distinction is especially important for frequent traders.
The favorable tax rates of 0%, 15% and 20% for long-term capital gains also apply to “qualified” dividends, and many dividends are in this category. Nonqualified dividends are taxed at ordinary income rates.
The 3.8% surtax
A 3.8% surtax applies to the net investment income of most single filers with modified adjusted gross income (MAGI) above $200,000 and most couples filing jointly with MAGI above $250,000. These income thresholds aren’t adjusted for inflation. The surtax applies only to the amount of net investment income above the thresholds.
Example: If Jim is a single taxpayer with MAGI of $210,000, and $50,000 of it is from long-term capital gains and qualified dividends, then the 3.8% surtax will apply to the $10,000 above the $200,000 threshold. This means this investor’s top tax rate on the $10,000 will be 18.8%.
The zero tax rate
The zero rate is a boon to taxpayers who qualify for it, but how it applies is complex because of the way investment income “stacks” on top of ordinary income.
Example: Marian is a single taxpayer with $35,000 of ordinary taxable income for 2024, which is taxed at a top rate of 12%. But she also has $20,000 in net long-term capital gains for 2024 that qualify for favorable rates, bringing her total taxable income to $55,000.
For 2024, the 0% tax bracket for single filers extends to $47,025, and the rate is 15% above that.
As a result, about $12,000 of Marian’s $20,000 of capital gains would be taxed at 0% and the rest at 15%.
The law treats cryptocurrencies as property, not currencies, and views them as investments similar to stock or real estate.
If cryptocurrency is held in a taxable account rather than a retirement account, then profits from sales are typically taxed as long- or short-term capital gains, and losses can be used to offset gains. The use of cryptocurrency to make a purchase can also trigger a taxable event that must be reported.
Example: Robert acquired cryptocurrency for $50,000, and its value has risen to $90,000. If Robert uses the $90,000 of crypto to buy a boat, the crypto transfer is taxable and he owes tax on $40,000 of gain.
Reorganizations
When a crypto network reorganizes and distributes new tokens that have value, the fair-market value of those tokens is taxable at ordinary income rates when the owner gains control of them.
Reporting requirement
The IRS includes a question on the front-page 1040 form as reminder of taxes due on cryptocurrencies. For 2024 returns, it says, “At any time during 2024, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
Capital gains at death
Under current law, investment assets held at death aren’t subject to capital-gains tax. This benefit is known as the tax-free step-up in basis.
Example: John dies owning stock valued at $100 a share that he bought for $5 a share. As a result, John’s estate won’t owe tax on the $95 of appreciation. Instead, the shares will go into his estate at their full market value, and heirs will receive them with a cost basis of $100 a share. This is important for heirs selling the shares, as their taxable gain or loss will be based on the change in the price between the date they inherited and the date of sale.
Gifting of investments
The annual gift-tax exclusion per donor, per recipient is $18,000 for 2024 and $19,000 for 2025. Annual gifts aren’t deductible for income-tax purposes, and the gifts aren’t taxable income to the recipient. However, the “cost basis” of the investment carries over to the recipient.
Example: Jane has long-held stock valued at $1,000 with a cost basis of $200, and she gives it to her granddaughter Susan. Susan’s cost basis in the gifted stock is $200, so if she sells it before her own death, her taxable gain or loss will likely be based on a starting point of $200.
Laura Saunders
Your Guide to Taxes for Investors
With these rules, details matter. The difference between a 15% and a 24% tax rate on a capital gain can come down to holding it one day longer. Selling losers to offset gains from winners can also reduce taxable gains for the year—if the investor remembers to.
Here are key tax considerations for investors (also see IRS Publication 550).
Capital gains and losses
When an investor sells an asset held in a taxable account, the result is a capital gain or loss. The gain or loss is the difference between the investment’s original cost (plus adjustments) and the selling price.
Example: If an investor buys shares for $8 each and sells them for $12, the capital gain is $4 each. Conversely, if a share is sold for $6, the capital loss is $2.
Offsetting
Capital losses can offset capital gains. If the investor in the example above sells both shares in the same year, the $4 gain and $2 loss are combined and the result is a taxable capital gain of $2.
If losses exceed gains, up to $3,000 of net losses can offset ordinary income (such as wages) a year. Unused capital losses can be carried forward to reduce future capital gains and ordinary income of up to $3,000 each year.
Rates on long- and short-term capital gains
Profits on sales of investments held for more than a year are long-term capital gains, and they are taxed at 0%, 15%, or 20%, depending on the investor’s taxable income.
Profits or losses on investments held for a year or less are short-term gains and losses. They are taxed at the same rates as ordinary income such as wages, which are higher than the rates on long-term gains. This distinction is especially important for frequent traders.
DIVIDENDS AND SPECIAL SITUATIONS
The favorable tax rates of 0%, 15% and 20% for long-term capital gains also apply to “qualified” dividends, and many dividends are in this category. Nonqualified dividends are taxed at ordinary income rates.
The 3.8% surtax
A 3.8% surtax applies to the net investment income of most single filers with modified adjusted gross income (MAGI) above $200,000 and most couples filing jointly with MAGI above $250,000. These income thresholds aren’t adjusted for inflation. The surtax applies only to the amount of net investment income above the thresholds.
Example: If Jim is a single taxpayer with MAGI of $210,000, and $50,000 of it is from long-term capital gains and qualified dividends, then the 3.8% surtax will apply to the $10,000 above the $200,000 threshold. This means this investor’s top tax rate on the $10,000 will be 18.8%.
The zero tax rate
The zero rate is a boon to taxpayers who qualify for it, but how it applies is complex because of the way investment income “stacks” on top of ordinary income.
Example: Marian is a single taxpayer with $35,000 of ordinary taxable income for 2024, which is taxed at a top rate of 12%. But she also has $20,000 in net long-term capital gains for 2024 that qualify for favorable rates, bringing her total taxable income to $55,000.
For 2024, the 0% tax bracket for single filers extends to $47,025, and the rate is 15% above that.
As a result, about $12,000 of Marian’s $20,000 of capital gains would be taxed at 0% and the rest at 15%.
CRYPTOCURRENCIES
The law treats cryptocurrencies as property, not currencies, and views them as investments similar to stock or real estate.
If cryptocurrency is held in a taxable account rather than a retirement account, then profits from sales are typically taxed as long- or short-term capital gains, and losses can be used to offset gains. The use of cryptocurrency to make a purchase can also trigger a taxable event that must be reported.
Example: Robert acquired cryptocurrency for $50,000, and its value has risen to $90,000. If Robert uses the $90,000 of crypto to buy a boat, the crypto transfer is taxable and he owes tax on $40,000 of gain.
Reorganizations
When a crypto network reorganizes and distributes new tokens that have value, the fair-market value of those tokens is taxable at ordinary income rates when the owner gains control of them.
Reporting requirement
The IRS includes a question on the front-page 1040 form as reminder of taxes due on cryptocurrencies. For 2024 returns, it says, “At any time during 2024, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
INHERITANCE AND GIFTS
Capital gains at death
Under current law, investment assets held at death aren’t subject to capital-gains tax. This benefit is known as the tax-free step-up in basis.
Example: John dies owning stock valued at $100 a share that he bought for $5 a share. As a result, John’s estate won’t owe tax on the $95 of appreciation. Instead, the shares will go into his estate at their full market value, and heirs will receive them with a cost basis of $100 a share. This is important for heirs selling the shares, as their taxable gain or loss will be based on the change in the price between the date they inherited and the date of sale.
Gifting of investments
The annual gift-tax exclusion per donor, per recipient is $18,000 for 2024 and $19,000 for 2025. Annual gifts aren’t deductible for income-tax purposes, and the gifts aren’t taxable income to the recipient. However, the “cost basis” of the investment carries over to the recipient.
Example: Jane has long-held stock valued at $1,000 with a cost basis of $200, and she gives it to her granddaughter Susan. Susan’s cost basis in the gifted stock is $200, so if she sells it before her own death, her taxable gain or loss will likely be based on a starting point of $200.
