What Forms or Steps Must You Take When Reporting Investments on Taxes?

Filing taxes on investments requires careful reporting to ensure accuracy and compliance with IRS rules. Whether you earn dividends, interest, or profits from selling assets, each type of investment income has specific tax implications. Failing to report these correctly can lead to penalties or additional scrutiny from the IRS.

To properly file your taxes, you’ll need to understand which forms to use, how to calculate gains and losses, and what records to keep.

Types of Income from Investments

Investment income comes in different forms, each with its own tax treatment. Rental income from real estate is taxable, but expenses such as mortgage interest, property taxes, insurance, and maintenance costs can be deducted, reducing taxable income. Rental income must be reported in the year it is received.

Royalties typically come from intellectual property like books, patents, or music rights. If you own mineral rights or oil and gas interests, you may also receive royalty payments. Tax treatment depends on whether you manage the asset or just collect payments. Depletion deductions may apply to natural resource royalties.

Annuities provide a steady stream of income, usually purchased from insurance companies. If funded with pre-tax money, the entire payout is taxable. If purchased with after-tax funds, only the earnings portion is taxable.

Key IRS Forms

The IRS requires different forms to report investment income. Financial institutions issue these documents to taxpayers and the IRS, summarizing earnings from dividends, interest, and asset sales. Using these forms correctly ensures accurate tax reporting and helps avoid penalties.

Dividend Income (Form 1099-DIV)

Dividends are payments made by corporations to shareholders. If you receive at least $10 in dividends from a single source, the financial institution must issue Form 1099-DIV. This form categorizes dividends into ordinary dividends, qualified dividends, and capital gain distributions, each taxed differently.

Ordinary dividends are taxed as regular income at rates ranging from 10% to 37% in 2024. Qualified dividends benefit from lower long-term capital gains tax rates of 0%, 15%, or 20%, depending on taxable income. To qualify, the stock must be held for more than 60 days during a 121-day period surrounding the ex-dividend date.

Capital gain distributions, often from mutual funds or real estate investment trusts (REITs), are taxed at long-term capital gains rates regardless of how long you held the investment. If you reinvest dividends through a dividend reinvestment plan (DRIP), they are still taxable in the year received.

Interest Income (Form 1099-INT)

Interest income is earned from savings accounts, certificates of deposit (CDs), bonds, and other interest-bearing investments. If you receive at least $10 in interest, you will receive Form 1099-INT, which details taxable and tax-exempt interest, early withdrawal penalties, and federal tax withheld.

Taxable interest includes earnings from bank accounts, corporate bonds, and U.S. Treasury securities. Treasury bond interest is exempt from state and local taxes but taxable at the federal level.

Tax-exempt interest, often from municipal bonds, is not subject to federal income tax but may be taxable at the state level if the bonds were issued outside your state of residence. It is also included in the calculation for determining whether Social Security benefits are taxable.

If you withdraw money early from a CD or similar investment, the penalty is reported on Form 1099-INT and can be deducted as an adjustment to income.

Sale of Investments (Form 1099-B)

When you sell stocks, bonds, mutual funds, or other securities, the brokerage issues Form 1099-B, which reports the proceeds, cost basis, and whether the gain or loss is short-term or long-term.

The cost basis represents the original purchase price, including commissions and fees. If the brokerage does not provide this information, you must calculate it manually using purchase records.

Short-term gains, from assets held for one year or less, are taxed as ordinary income. Long-term gains, from assets held for more than a year, are taxed at 0%, 15%, or 20%. Losses can offset gains, and if total losses exceed gains, up to $3,000 ($1,500 for married filing separately) can be deducted against ordinary income, with any remaining losses carried forward.

Form 1099-B also reports wash sales, which occur when you sell a security at a loss and repurchase a substantially identical security within 30 days before or after the sale. The IRS disallows the loss in these cases, requiring an adjustment to the cost basis of the new purchase.

Calculating Gains and Losses

To determine taxable gains or losses, start with the cost basis, which includes the original purchase price, transaction fees, and reinvested earnings. If shares were acquired through multiple transactions, investors can use different accounting methods—First-In, First-Out (FIFO), Last-In, First-Out (LIFO), or Specific Identification—to determine which shares were sold and their respective cost basis.

If shares were received through an employee stock purchase plan (ESPP) or inherited, special rules apply. Inherited assets generally receive a “step-up” in basis to their fair market value at the date of the original owner’s death, reducing potential capital gains tax if sold soon after. ESPP shares may be subject to both ordinary income tax and capital gains tax depending on the holding period and purchase discount.

Tax-loss harvesting allows investors to sell underperforming assets to offset gains, reducing taxable income. If capital losses exceed gains, individuals can deduct up to $3,000 ($1,500 for married filing separately) against ordinary income, with any excess carried forward indefinitely. Holding investments for more than a year can also lead to more favorable tax rates.

Steps for Filing Returns

Accurate tax reporting begins with gathering all necessary documents, including brokerage statements, partnership K-1s, and records of any foreign investments. Consolidating information ensures nothing is overlooked, especially for complex holdings like options contracts or cryptocurrency transactions. The IRS requires detailed reporting for digital assets, including the date of acquisition, sale price, and any associated fees.

Taxpayers must determine their filing method. Those with straightforward investment income may use tax preparation software, which imports Form 1099 data. More complex situations, such as passive activity losses or foreign tax credits, may require professional tax assistance. Form 1116 is necessary when claiming foreign tax credits to avoid double taxation on international earnings.

For those with significant investment activity, estimated tax payments may be necessary to avoid penalties. The IRS requires taxpayers to pay at least 90% of their current year’s liability or 100% of the prior year’s taxes (110% for higher-income filers) to avoid underpayment penalties.

Retaining Documentation

Keeping thorough records is essential for accurate tax reporting and potential IRS audits. The IRS generally has three years to audit a return, but this period extends to six years if income is underreported by more than 25%. If fraud is suspected, there is no statute of limitations.

Investment-related documents should be kept for at least three years after filing, but records related to cost basis, such as purchase confirmations and reinvested dividends, should be retained until the asset is sold. Taxpayers should organize records by investment type, including brokerage statements, trade confirmations, and documentation of corporate actions like stock splits or mergers.

For rental properties, records of depreciation schedules, repair costs, and lease agreements should be preserved, as these impact taxable income upon sale. Digital assets require additional diligence, as exchanges may not provide comprehensive tax forms. Using portfolio tracking software or exporting transaction histories ensures accurate reporting.