Investment income taxes

What we'll cover on this page: 

Capital gains, dividends, and interest income

Most investment income is taxable. But your exact tax rate will depend on several factors, including your tax bracket, the type of investment, and (with capital assets like stocks or property) how long you own them before selling. 

Let's take a look

  • Capital gains

    If you sell an asset for more than you paid for it, your profit (minus your cost basis) is called a capital gain. 

     

    Short-term capital gains are profits from selling assets you own for a year or less. They're usually taxed at ordinary income tax rates (10%, 12%, 22%, 24%, 32%, 35%, or 37%).

     

    Long-term capital gains are profits from selling assets you own for more than a year. They're usually taxed at lower long-term capital gains tax rates (0%, 15%, or 20%).

     

    Capital gains from stock sales are usually shown on the 1099-B Tooltip you get from your bank or brokerage or on a K-1 Tooltip .

  • Dividends

    Dividends Tooltip can be ordinary or qualified, and each are taxed at different rates.

     

    Ordinary dividends are taxed at ordinary income tax rates. They're usually reported in box 1 of the 1099-DIV Tooltip you get from your bank or brokerage or on a K-1.

     

    Qualified dividends are taxed at lower capital gains tax rates. If you receive them, they should appear in box 1b of your 1099-DIV.

  • Interest income

    Most types of interest income are taxed at ordinary income tax rates.

     

    Some interest income may be exempt from federal tax, such as:

     

    • Municipal bond interest 
    • Private activity bonds
    • Exempt-interest dividends (for example, from a mutual fund that invests in municipal bonds) 

    Interest incomes is usually shown on the 1099-INT Tooltip you get from your bank or brokerage or on a K-1.

Net investment income tax (NIIT)

If you have investment income and your modified adjusted gross income (MAGI) Tooltip is more than the amounts below, you may also owe a 3.8% net investment income tax (sometimes called NIIT).

Here are the MAGI thresholds for net investment income tax:

Here are the MAGI thresholds for net investment income tax:

Filing status  MAGI threshold 
Single  $200,000
Married filing jointly $250,000
Married filing separately  $125,000

If you owe this tax

If you owe this tax, it will apply only to your total net investment income or the portion of your net investment income the exceeds the MAGI threshold—whichever is less.

Find out what counts as net investment income, and what doesn't.

Cost basis

Did you sell investments this year? If so, you probably have a capital gain or loss Tooltip to report on your tax return—which means you'll also need to report your original or adjusted cost basis. The IRS uses it to calculate your capital gains tax Tooltip , so not reporting it correctly can cause you to pay too much or too little tax.  

  • What is cost basis?

    Your cost basis is the original purchase price you paid for an investment, plus commissions, fees, “loads,” and any other transaction costs you paid to acquire the investment.

  • What is adjusted cost basis?

    In some cases, you may need to adjust—increase or decrease—your original cost basis. The most common reasons for this include reinvested dividends, wash sales, and corporate actions (such as mergers, spinoffs, and stock splits).

Here's an example

Say you invest $10,000 (including commissions and fees) in a stock that pays $200 in taxable dividends, and you automatically reinvest your dividends. This gives you an original cost basis of $10,000—and an adjusted cost basis of $10,200.

If you sell your stock, using the higher (adjusted) cost basis on your taxes will reduce your capital gain by an additional $200 and cause you to owe less tax. If you lose money on your stock sale (have a capital loss), you'll still want to use the higher cost basis because the IRS will add it to your loss, which may further reduce your taxable income.
 

Investment income taxes

Learn more

Learn more about cost basis—why it's important and how to calculate yours.

Additional taxes you might owe (AMT, UBTI, foreign taxes)

As an investor, business owner, or high earner, you may be more likely to owe additional taxes on top of ordinary income and capital gains taxes. Here are three additional taxes you should know about.

Additional taxes you might owe

Alternative minimum tax (AMT) Unrelated business taxable income (UBTI) Foreign taxes
AMT is an alternate tax calculation with different rules than regular tax. It's designed to make sure all taxpayers pay at least the minimum amount of tax.

Situations that can trigger AMT include having a high household income, realizing a large capital gain, or exercising stock options. 
 
If you own a tax-exempt entity that gets part of its income from activities that aren't directly related to the organization's main purpose, you may owe UBTI tax. Investments in a retirement account that earn UBTI can also trigger this tax. 

The tax applies only to the portion of income from unrelated business activities Tooltip . Income from interest, dividends, and capital gains are not usually included in UBTI. 

For more information, visit www.irs.gov.
Dividends, interest, and capital gains from international investments may be taxed by the foreign country, as well as by the United States.

That's double taxation. But in most cases, you can put some or all of the qualified foreign tax Tooltip you paid back into your pocket by taking the foreign tax credit or claiming the foreign taxes as an itemized deduction.

To determine if you paid foreign taxes, check your related K-1, 1099-DIV, 1099-INT, or 1099-B.   

Learn more about AMT and how to know if you owe it.

Learn more about AMT and how to know if you owe it.

What you can do next