How Are Non-Retirement Accounts Taxed? Interest, Gains, and Dividends

Money you earn in a regular brokerage account, savings account, or CD is taxed the year you earn it, and the rate depends on what kind of income it is. Interest and short-term trading profits are taxed as ordinary income at rates up to 37%. Long-term capital gains and qualified dividends get preferential rates of 0%, 15%, or 20%. Unrealized appreciation is not taxed until you sell. That is the short answer to how non-retirement accounts are taxed; the details below explain what falls into each bucket and how to keep the bill down.

Interest Income

Interest from savings accounts, CDs, money market accounts, and most bonds is ordinary income on your federal return.1Internal Revenue Service. Topic No. 403, Interest Received It stacks on top of your wages and is taxed at whatever marginal bracket you land in, with 2026 federal rates running from 10% to 37%.2Internal Revenue Service. Federal Income Tax Rates and Brackets There is no preferential rate for interest the way there is for long-term capital gains. In the 24% bracket, every dollar of interest from a high-yield savings account is taxed at 24%.

Two exceptions matter. Interest on state and local government bonds (municipal bonds) is excluded from federal gross income, so you owe no federal tax on it.3Office of the Law Revision Counsel. 26 U.S. Code 103 – Interest on State and Local Bonds Not every bond labeled municipal qualifies: certain private activity bonds, arbitrage bonds, and bonds that fail registration rules lose the exemption. Series EE and I savings bonds let you choose when to pay: report the interest each year as it accrues, or defer until you redeem, the bond matures, or you transfer it.4TreasuryDirect. Tax Information for EE and I Bonds Most people defer. Once you pick a method, you have to stick with it unless the IRS approves a switch.

Capital Gains on Investment Sales

Selling a stock, ETF, mutual fund, or other investment at a profit triggers a capital gain, and how long you owned it drives the rate. The dividing line is one year. A profit on something held one year or less is a short-term gain, taxed at ordinary income rates up to 37%.5Office of the Law Revision Counsel. 26 U.S. Code 1222 – Other Terms Relating to Capital Gains and Losses Hold more than a year, and the gain is long-term, taxed at 0%, 15%, or 20% depending on your taxable income.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses

For 2026, single filers with taxable income up to roughly $49,450 pay 0% on long-term gains. The 15% rate covers most filers above that. The 20% rate kicks in only at high incomes, around $545,500 for single filers and $613,700 for married couples filing jointly. These thresholds adjust for inflation annually.

Realized vs. Unrealized Gains

A gain is not taxable until you sell. If you bought $10,000 of stock now worth $15,000, you have a $5,000 unrealized gain and owe nothing on it. The IRS only counts the gain when you realize it through a sale. This is why long-term buy-and-hold investors can defer capital gains for decades without any special account structure. The moment you sell, the full profit becomes reportable income for that year, even if you reinvest the proceeds the same day.

Cost Basis

Your taxable gain is the sale price minus your cost basis, which is essentially what you paid including commissions. If you bought the same stock at different times and prices, the method you use to identify which shares you sold changes your tax bill. The default is first-in, first-out (FIFO), which assumes you sold the oldest shares first.7Internal Revenue Service. Publication 551, Basis of Assets If you can point to the specific shares you want to sell, such as higher-cost shares that would produce a smaller gain, you can use specific identification. Most brokerages let you pick a method in your account settings, and it is worth setting before you start selling.

Inherited Investments

Investments you inherit in a non-retirement account get a reset cost basis equal to the asset’s fair market value on the date the original owner died.8Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired from a Decedent If a parent bought stock for $5,000 that was worth $50,000 at death, your basis is $50,000. Sell the next day at $50,000 and you owe no capital gains tax. All the appreciation during the original owner’s lifetime is erased for tax purposes.

Dividends

Dividends split into two buckets with very different tax consequences. Ordinary dividends are taxed at your regular income rate, the same as wages and interest. Qualified dividends get the preferential long-term capital gains rates of 0%, 15%, or 20%.9Office of the Law Revision Counsel. 26 U.S. Code 1 – Tax Imposed – Section: Maximum Capital Gains Rate For someone in the 32% bracket, that difference on $5,000 in dividends can save more than $800.

To qualify, you have to hold the stock for more than 60 days during the 121-day window that begins 60 days before the ex-dividend date.9Office of the Law Revision Counsel. 26 U.S. Code 1 – Tax Imposed – Section: Maximum Capital Gains Rate The payer must be a U.S. corporation or a qualified foreign corporation. Dividends from most large domestic companies meet both tests once you have held the shares a few months. Distributions from REITs, money market funds, and some foreign entities usually do not.

Mutual Fund Capital Gain Distributions

Mutual funds add a wrinkle that surprises new investors. When a fund manager sells profitable holdings inside the fund, the fund passes those gains to shareholders, and those distributions are taxable to you even if you reinvest every penny. Capital gain distributions are always treated as long-term regardless of how long you personally held the fund shares.10Internal Revenue Service. Mutual Funds (Costs, Distributions, Etc.) 4 They show up in box 2a of Form 1099-DIV. Index funds and ETFs tend to be more tax-efficient in taxable accounts because they generate far fewer internal sales.

Using Losses to Cut the Bill

Losses on investment sales are useful at tax time. Capital losses offset capital gains dollar for dollar. Sell one holding at a $3,000 gain and another at a $3,000 loss the same year and they cancel out completely. Short-term losses offset short-term gains first, long-term losses offset long-term gains first, and any leftover is netted across the two categories.

If total losses exceed total gains, you can deduct up to $3,000 of the excess against ordinary income like wages and interest ($1,500 if married filing separately).11Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses Anything above that $3,000 carries forward indefinitely, keeping its short-term or long-term character.12Office of the Law Revision Counsel. 26 U.S. Code 1212 – Capital Loss Carrybacks and Carryovers A $20,000 net capital loss in a bad year does not disappear. It offsets gains and income over the next several years until it is used up.

The Wash Sale Rule

One shortcut the IRS blocks. 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 loss is disallowed.13Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss from Wash Sales of Stock or Securities You cannot harvest a loss Monday and buy the same shares Tuesday. The disallowed loss is added to the cost basis of the replacement shares, so you eventually benefit when you sell those, but you lose the immediate deduction. To stay invested in a sector while harvesting a loss, you would buy a different security that is not substantially identical.

The 3.8% Net Investment Income Tax

Higher earners face an extra surtax. The Net Investment Income Tax adds 3.8% when your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).14Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax The tax applies to the lesser of your net investment income or the amount your MAGI exceeds the threshold. Net investment income includes interest, dividends, capital gains, rental income, and royalties.15Internal Revenue Service. Questions and Answers on the Net Investment Income Tax The thresholds were set by statute in 2013 and are not adjusted for inflation, so more taxpayers get pulled in each year.16Internal Revenue Service. Net Investment Income Tax A single filer earning $220,000 with $30,000 of investment income would owe 3.8% on $20,000, adding $760 on top of the regular income and capital gains tax.

Paying Throughout the Year

Brokerages do not withhold taxes on interest, dividends, and capital gains the way an employer does on wages, so the responsibility falls on you. If you have substantial investment income, you may need quarterly estimated payments to avoid an underpayment penalty.17Internal 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

The penalty is generally avoided by paying at least 90% of your current-year tax through withholding and estimated payments combined, or 100% of last year’s tax (110% if your prior-year AGI exceeded $150,000). Estimated payments are due April 15, June 15, September 15, and January 15 of the following year. If you have a paycheck, increasing your W-4 withholding is often easier than mailing quarterly checks.

Forms You Will See

Financial institutions report your investment income to you and to the IRS on the 1099 series:

Institutions must send 1099-INT and 1099-DIV by early February (February 2 for the 2025 tax year). Form 1099-B has a later mid-February deadline.21Internal Revenue Service. 2025 General Instructions for Certain Information Returns These forms are only issued when the payer sent you at least $10 in interest or dividends during the year.22Internal Revenue Service. Instructions for Form 1099-DIV Amounts under $10 are still taxable and still have to be reported.1Internal Revenue Service. Topic No. 403, Interest Received

When you sell investments, you also report each sale on Form 8949, which reconciles what your broker sent to the IRS with your own records.23Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets Cost basis corrections happen here, which matters when a broker’s basis is wrong for shares transferred in from another institution or received through mergers or spin-offs. The totals then flow to Schedule D of Form 1040, where your overall gain or loss is calculated.24Internal Revenue Service. 2025 Instructions for Form 8949 You are responsible for the accuracy of what ends up on your return.

State Taxes

Federal is only part of the picture. Most states also tax investment income, with rates ranging from 0% in states with no individual income tax to more than 13% at the top end. Some states treat capital gains and interest the same as wages; others offer partial exemptions on certain investment income. The combined federal and state rate on short-term gains or interest can top 40% for high earners in high-tax states, so your state’s rules deserve as much attention as the federal ones before you make significant moves in a taxable account.