Is a Brokerage Account Taxable? How the Taxes Work
Understand how income and gains in your brokerage account are taxed and what you need to report to the IRS.
A brokerage account, which is an investment account used to hold various securities such as stocks, bonds, and mutual funds, is generally subject to taxation. Understanding how different aspects of a brokerage account are taxed is important for investors.
Income and Gains Subject to Tax
Brokerage accounts can generate several types of income and gains that are subject to taxation. These typically include dividends, interest, and capital gains.
Dividends are distributions of a company’s profits to its shareholders. These payments can be classified as either qualified or non-qualified. While both types represent taxable income, their classification impacts how they are taxed.
Interest income arises from debt-based investments held within the brokerage account, such as bonds or money market funds. The amount of interest received is considered taxable income in the year it is earned.
Capital gains occur when an investment is sold for more than its original purchase price, known as its cost basis. Capital gains are only realized and become taxable when the asset is actually sold, not simply when its market value increases. These gains are categorized as either short-term or long-term, depending on the holding period of the asset.
How Investment Income is Taxed
The taxation of investment income from a brokerage account varies depending on the type of income and the holding period of the asset.
Interest income and non-qualified dividends are generally taxed at ordinary income tax rates. These rates are the same as those applied to other forms of income, such as wages. For the 2025 tax year, ordinary income tax rates range from 10% to 37%.
Capital gains are taxed based on how long the asset was held before being sold. Short-term capital gains, which result from selling an asset held for one year or less, are taxed at ordinary income tax rates. This means they are subject to the same tax brackets as interest income and non-qualified dividends.
Long-term capital gains, derived from assets held for more than one year, receive preferential tax treatment. These gains are taxed at lower rates: 0%, 15%, or 20%, depending on the taxpayer’s overall taxable income. Qualified dividends are also taxed at these same preferential long-term capital gains rates. For example, for a single filer in 2025, the 0% rate applies to lower taxable incomes, the 15% rate to moderate incomes, and the 20% rate to higher incomes.
Capital losses can be used to offset capital gains, which can reduce the overall taxable amount. If capital losses exceed capital gains in a given year, taxpayers can deduct up to $3,000 of those net losses against their ordinary income annually. Any remaining net capital losses exceeding this $3,000 limit can be carried forward indefinitely to offset capital gains or a portion of ordinary income in future tax years.
Tax Reporting Requirements
Taxpayers receive specific forms from their brokerage firms to report income and gains for tax purposes. These forms provide the necessary information to complete an individual’s tax return.
Form 1099-B, titled “Proceeds From Broker and Barter Exchange Transactions,” reports the sales of stocks, bonds, and other securities. This form includes details such as the sales proceeds and the cost basis of the sold assets, which is crucial for calculating capital gains or losses. Brokers are generally required to send this form by February 15 following the tax year.
Dividend income is reported on Form 1099-DIV, “Dividends and Distributions.” This form specifies the total ordinary dividends and distinguishes the portion considered qualified dividends. Financial institutions issue Form 1099-DIV to taxpayers who receive $10 or more in dividend income during the year.
Interest income earned in a brokerage account is reported on Form 1099-INT, “Interest Income.” This form details the amount of interest received and indicates if any of it is tax-exempt or if federal taxes were withheld. Similar to dividends, this form is typically issued when $10 or more in interest is earned from a single entity.
Information from these 1099 forms is used to complete relevant schedules on a personal tax return, Form 1040. For instance, interest and ordinary dividends are typically reported on Schedule B, “Interest and Ordinary Dividends,” especially if the total exceeds $1,500. Capital gains and losses from the sale of securities are reported on Schedule D, “Capital Gains and Losses,” often in conjunction with Form 8949, “Sales and Other Dispositions of Capital Assets.” These schedules summarize the investment activity and contribute to the overall calculation of taxable income.