When Do You Pay Taxes on Investments?

An increase in an investment’s value while you still own it is an unrealized gain and does not trigger a tax bill. You only owe tax on a “realized gain,” which occurs when you sell an asset for more than you paid for it. The taxable event is the act of selling or disposing of the asset, which locks in the profit and creates a tax liability for that year.

Identifying Taxable Investment Events

Selling an Asset

The most common action that creates a tax liability is selling an investment for a profit. When you sell a stock, bond, or mutual fund for more than its original purchase price, known as the “cost basis,” the profit is a capital gain. This gain is considered income and must be reported on your tax return for the year of the sale. The cost basis includes the price you paid plus other costs like brokerage fees or commissions.

Receiving Dividends

Companies may distribute a portion of their profits to shareholders as dividends. These payments are taxable income in the year you receive them, even if you reinvest them to buy more shares. Your brokerage reports this income to you and the IRS, and it must be included on your tax return.

Dividends are categorized as either qualified or non-qualified. Qualified dividends are taxed at the lower long-term capital gains rates, while non-qualified dividends are taxed at your higher, ordinary income tax rate. To be “qualified,” the dividend must be from a U.S. or qualifying foreign corporation, and you must have held the stock for a specific period around the ex-dividend date.

Receiving Interest

Interest payments you receive from investments are another form of taxable income. This includes interest earned on bonds, certificates of deposit (CDs), or cash held in a brokerage account’s money market fund. This interest income is taxed at your ordinary income tax rate. Your financial institution will send you a tax form detailing the total interest you received, which you must report as income.

Receiving Capital Gains Distributions

Investors in mutual funds and exchange-traded funds (ETFs) can face a capital gains distribution. These occur when the fund manager sells assets within the fund’s portfolio for a profit. By law, the fund must distribute these realized gains to its shareholders, which is a taxable event for you in the year they are made, even if you haven’t sold any of your shares. These distributions are almost always considered long-term capital gains.

Determining Your Capital Gains Tax Rate

Short-Term Capital Gains

The length of time you own an asset, or holding period, determines the tax rate on any profit. A short-term capital gain results from selling an asset held for one year or less. These gains are taxed at your ordinary income tax rate, which is the same rate applied to your wages. For the 2025 tax year, these rates range from 10% to 37%, depending on your total taxable income and filing status.

Long-Term Capital Gains

A long-term capital gain occurs when you sell an asset held for more than one year. These gains are taxed at more favorable rates of 0%, 15%, or 20%. The specific rate is determined by your taxable income and filing status. High-income earners may also be subject to an additional 3.8% Net Investment Income Tax.

For the 2025 tax year, the 0% rate applies to single filers with taxable income up to $48,350 and married couples filing jointly with income up to $96,700. The 15% rate for single filers applies to income from $48,351 to $533,400, and for joint filers, it applies to income from $96,701 to $600,050. The 20% rate applies to income above those thresholds.

2025 Long-Term Capital Gains Tax Brackets

| Tax Rate | Single Filers | Married Filing Jointly | Head of Household |
| :— | :— | :— | :— |
| 0% | Up to $48,350 | Up to $96,700 | Up to $64,750 |
| 15% | $48,351 – $533,400 | $96,701 – $600,050 | $64,751 – $566,700 |
| 20% | Over $533,400 | Over $600,050 | Over $566,700 |

The Role of Account Type in Tax Timing

Taxable Accounts

A standard brokerage account is a taxable account. In these accounts, you are responsible for paying taxes on any realized capital gains, dividends, interest, or capital gains distributions in the year those events occur. When you invest with after-tax money in a taxable account, any income generated is reported annually.

Tax-Deferred Accounts

Tax-deferred accounts, such as a Traditional 401(k) or a Traditional IRA, change when you pay taxes. You may contribute pre-tax dollars, and your investments grow tax-deferred, meaning you do not pay taxes on interest, dividends, or capital gains as they are earned each year.

The taxable event is postponed until retirement. When you begin taking withdrawals, or “distributions,” from a Traditional 401(k) or IRA, that money is taxed as ordinary income. This applies to both your original contributions and all the investment earnings.

Tax-Exempt Accounts

Tax-exempt accounts, most notably the Roth 401(k) and Roth IRA, offer a different tax advantage. Contributions are made with after-tax dollars, so you do not get an upfront tax deduction. The benefit is that your investments grow completely tax-free within the account.

Qualified withdrawals in retirement are entirely free from federal income tax. This means you pay no taxes on your contributions or any of the earnings your investments have generated. To be a “qualified distribution,” you must be at least 59½ years old and have held the account for at least five years.

Reporting and Paying Investment Taxes

Tax Forms You Will Receive

Your brokerage firm will send you several documents summarizing your investment activity.

• Form 1099-B details the sales of securities, including dates and proceeds, and is used to calculate capital gains or losses.
• Form 1099-DIV reports any dividends or capital gains distributions you received.
• Form 1099-INT is for interest income from bonds or cash.

These forms provide the data needed to report your investment income to the IRS.

Tax Forms You Will File

The information from your 1099 forms is transferred to schedules filed with your Form 1040 tax return. You use Form 8949 to list the details of each asset sale from your Form 1099-B and calculate the gain or loss for each transaction.

The totals from Form 8949 are then summarized on Schedule D, where you separate short-term and long-term gains and losses. This is where you calculate your net capital gain or loss for the year. The final figure from Schedule D is then carried over to your Form 1040.

How and When to Pay

Taxes owed on investment income are paid once a year when you file your annual tax return. The total tax liability is calculated, and any amount not covered by withholdings is due by the tax filing deadline, which is in April.

If you realize a large capital gain, you may need to make estimated tax payments. If you expect to owe $1,000 or more in tax for the year beyond what is withheld, you should make quarterly payments to avoid an underpayment penalty. You can use Form 1040-ES to calculate and pay these estimates, which are due in April, June, September, and January.