Taxes on a brokerage account come due each year on the income the account produces: realized capital gains when you sell at a profit, plus dividends and interest as they’re paid. There’s no upfront deduction and no shelter, but the rates you pay depend heavily on choices you control, mainly how long you hold before selling and which type of income you generate. For 2026, profits on positions held more than a year are taxed at 0%, 15%, or 20%; profits on shorter holds and most interest are taxed at your ordinary income rate, which runs from 10% to 37%.
Capital Gains: The One-Year Line
Sell a stock, ETF, or other security for more than you paid and the profit is a capital gain. Sell within a year of buying and it’s a short-term gain, taxed at your ordinary income rate. Hold for more than a year and it qualifies for long-term rates.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses
For 2026, the long-term brackets for single filers are 0% on taxable income up to $49,450, 15% from $49,451 to $545,500, and 20% above $545,500. For married couples filing jointly, the 0% rate runs up to $98,900, the 15% rate covers $98,901 to $613,700, and the 20% rate applies above $613,700.
The gap between short-term and long-term rates is the single biggest tax lever most investors have. A single filer earning $100,000 who sells early pays up to 24% on a short-term gain instead of 15% on a long-term one. If you’re a few weeks away from the one-year mark on a winning position, waiting is often worth it.
Dividends and Interest
You owe tax on dividends and interest in the year they hit your account, whether you take the cash or reinvest it automatically.2Internal Revenue Service. Stocks (Options, Splits, Traders) 2 What rate applies depends on the type.
Qualified vs. Ordinary Dividends
Dividends from U.S. corporations and certain qualified foreign corporations are taxed at the lower long-term capital gains rates if you meet a holding-period test: more than 60 days held during the 121-day window that starts 60 days before the ex-dividend date.3Internal Revenue Service. Instructions for Form 1099-DIV Dividends that clear the test are “qualified.” For an investor in the 15% capital gains bracket, that’s often 15% instead of a 22% or 24% marginal rate.
Dividends that don’t meet the test, along with dividends from REITs and money market funds, are “ordinary” and taxed at your full income rate.4Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined Your year-end 1099-DIV breaks out both categories, so you don’t have to track the holding period yourself.
Interest and the Municipal Bond Exception
Interest from corporate bonds, CDs, and Treasury securities is taxed as ordinary income. Interest from state and local government bonds (municipal bonds) is excluded from federal gross income.5Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds That’s the main reason municipal bonds appeal to investors in higher brackets even though their stated yields tend to be lower. Your broker reports taxable interest on Form 1099-INT and tax-exempt interest separately.
Foreign Tax Credit
If you hold international funds or foreign shares, the foreign government often withholds tax on dividends before you get them. You can generally claim a dollar-for-dollar credit on your U.S. return for those taxes. When your total foreign taxes for the year are $300 or less ($600 on a joint return) and all the foreign income is passive investment income shown on a 1099, you can claim the credit directly without filing Form 1116. Above those thresholds, Form 1116 is required.6Internal Revenue Service. Foreign Tax Credit – How to Figure the Credit
Using Losses to Cut Your Bill
When you sell a security for less than your cost basis, the loss offsets any capital gains you realized during the same year, dollar for dollar. If your losses exceed your gains, you can deduct up to $3,000 of net capital losses against ordinary income ($1,500 if married filing separately).7Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses Anything left over carries forward to future years indefinitely.
That’s the mechanic behind tax-loss harvesting: selling a losing position on purpose near year-end to book the loss. Carried-forward losses don’t expire. A $15,000 net loss can offset $3,000 of ordinary income each year for five years, or wipe out $15,000 of future capital gains in a single year.
The Wash Sale Rule
The catch on loss harvesting: if you sell a security at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale, the IRS disallows the loss.8Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The 61-day window (30 days before, the sale date, and 30 days after) exists to stop investors from booking a loss without truly exiting.
The rule crosses accounts, including IRAs and your spouse’s accounts. Selling a stock at a loss in your brokerage and buying it back the same day in your IRA is still a wash sale. The disallowed loss isn’t lost forever: it’s added to the cost basis of the replacement shares, and the original holding period tacks on. You get the benefit later, when you sell those shares.
“Substantially identical” is not sharply defined. Selling one S&P 500 index fund and buying a different provider’s S&P 500 fund is risky. Swapping an S&P 500 fund for a total market fund is generally treated as different enough, though the IRS has never drawn a bright line.
Choosing Which Shares to Sell
When you own shares of the same security bought at different times and prices, the cost basis method decides which shares are treated as sold. The default for most securities is first-in, first-out (FIFO), which assumes the oldest shares go first.9Internal Revenue Service. Publication 551, Basis of Assets For mutual funds you can also use the average cost method.
FIFO is fine when prices have generally risen: the oldest shares have the lowest basis, but they also have the longest holding period and qualify for long-term rates. Specific identification lets you pick the lot instead. Say you bought 100 shares at $40 in January and 100 more at $55 in November, and the stock is now $60. Selling the November lot produces a $5 gain instead of a $20 gain, though it’s short-term and taxed at your ordinary rate. Whichever route saves more depends on your bracket and how close the November shares are to their one-year mark.
You generally need to elect the method before the sale settles. Most brokers let you set a default or pick the lot at trade time. Once you’ve used average cost for a particular mutual fund, switching to specific identification for that same fund takes careful handling.
Net Investment Income Tax
Higher earners face an additional 3.8% surtax on investment income. The Net Investment Income Tax applies when modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).10Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax The tax hits the lesser of your net investment income or the amount by which your income tops the threshold.
Net investment income includes capital gains, dividends, interest, rental income, and royalties. It does not include wages, Social Security benefits, or distributions from qualified retirement plans.11Internal Revenue Service. Questions and Answers on the Net Investment Income Tax Selling a large position in one year can push you across the threshold even if you’re usually below it. A married couple with $230,000 in wages who realize a $50,000 gain have MAGI of $280,000 and owe 3.8% on the $30,000 above $250,000. Spreading a large gain across tax years, when the position allows it, is one way to manage the exposure.
The Forms You’ll See and File
Your broker reports your activity to you and to the IRS on year-end forms, usually bundled into a single consolidated 1099. Expect them by mid-February.
- Form 1099-B reports gross proceeds and cost basis for every security you sold.12Internal Revenue Service. Instructions for Form 1099-B
- Form 1099-DIV breaks out ordinary and qualified dividends, plus any foreign tax withheld.
- Form 1099-INT reports taxable interest.
To file, the 1099-B data transfers to Form 8949, where each sale is categorized as short-term or long-term. The Form 8949 totals flow to Schedule D, which calculates your net gain or loss, and that figure carries to your Form 1040.13Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets Most tax software imports 1099 data and routes the forms automatically.
Check the cost basis on your 1099-B against your own records. Brokers are only required to report basis for “covered” securities, generally stocks acquired after 2011 and mutual funds acquired after 2012. For older holdings or shares transferred in from another broker, the basis field may be blank or wrong. If you file with a missing basis, it defaults to zero, which inflates your reported gain and your tax bill.
The IRS matches its copies of your 1099s against your return, so mismatches generate notices. Beyond the tax owed, the accuracy-related penalty runs 20% of the underpayment when the IRS finds negligence or a substantial understatement,14Internal Revenue Service. Accuracy-Related Penalty and the failure-to-pay penalty adds 0.5% of unpaid tax per month up to 25%.15Internal Revenue Service. Failure to Pay Penalty Cleaning up cost basis before you file is the cheapest defense against both.
Estimated Tax Payments
If you expect to owe $1,000 or more beyond what’s withheld from wages, you’re generally required to make quarterly estimated payments. This catches brokerage investors off guard after a big gain year or a jump in dividends. Due dates are April 15, June 15, September 15, and January 15 of the following year.16Internal Revenue Service. Pay As You Go, So You Won’t Owe: A Guide to Withholding, Estimated Taxes, and Ways to Avoid the Estimated Tax Penalty
If you also have wage income, one workaround is to bump up your W-2 withholding to cover the investment tax. The IRS treats withholding as paid evenly across the year, so increasing withholding late in the year still avoids the underpayment penalty on a gain realized months earlier. Simpler than mailing four vouchers.
How Long to Keep Records
The IRS generally has three years from filing to assess additional tax, so keep 1099s, trade confirmations, and cost basis records for at least three years after the return they support.17Internal Revenue Service. How Long Should I Keep Records Understate gross income by more than 25% and the window stretches to six years.
In practice, keep them longer. Cost basis for shares you still own matters until you sell, which could be decades out. Brokers hold digital records for several years, but transfers between firms and account closures create gaps. Downloading your annual transaction history and storing it independently takes about five minutes and saves the guesswork later.