IRS Publication 550 is the federal government’s guide to reporting investment income and expenses on your tax return. It walks through how interest, dividends, and capital gains are taxed, how to figure your basis in an investment, which losses you can deduct, and which forms carry each number to your return. If you own stocks, bonds, mutual funds, CDs, or similar assets, Publication 550 is the reference the IRS points to when questions come up.
Figuring Your Basis Before You Sell
Basis is what you paid for an investment, including purchase commissions and transaction fees. When you sell, your gain or loss is the difference between the sale price and that basis. Track it carefully from the day you buy, because a higher basis means a smaller taxable gain.
Basis gets trickier when you’ve bought shares of the same stock or fund at different times and prices. You need a rule for deciding which shares you’re selling.
FIFO and Specific Identification
If you don’t tell your broker which shares to sell, the IRS treats the oldest ones in your account as sold first. This first-in, first-out approach often produces the largest taxable gain, because your earliest purchases were usually at the lowest prices.1Internal Revenue Service. Publication 550 – Investment Income and Expenses
The alternative is specific identification. You tell your broker exactly which lot to sell before the trade executes and get written confirmation back. That lets you pick higher-basis shares to shrink the gain, or shares held more than a year to lock in long-term rates. The designation has to happen at the time of sale, not after.1Internal Revenue Service. Publication 550 – Investment Income and Expenses
Average Cost for Mutual Funds
Mutual fund investors have a third option. Add up the total cost of all shares you own in a fund, divide by the number of shares, and use that per-share average as your basis. You must elect the method, and once you use it for a sale in a given fund, you generally can’t switch back to FIFO or specific identification for the remaining shares from those lots.2Internal Revenue Service. Mutual Funds (Costs, Distributions, etc.)
Adjustments That Quietly Change Basis
Two common events shift your basis over time. Reinvested dividends are new purchases, each with its own basis; if you forget them, you’ll overstate your gain when you sell. A return of capital distribution isn’t taxable when received but reduces your basis dollar for dollar. Once return-of-capital distributions drive your basis to zero, further distributions are taxed as capital gains.
Interest Income
Interest from bank accounts, money market accounts, CDs, and corporate bonds is taxed at your ordinary income rate. If you received $10 or more in interest during the year, the payer sends a Form 1099-INT.3Internal Revenue Service. Topic No. 403, Interest Received
Interest from municipal bonds is generally exempt from federal income tax, but you still report it on your return. It can affect other calculations, including the Net Investment Income Tax discussed below.
Bonds bought at a discount to face value create Original Issue Discount. Even without receiving cash, you report a portion of that discount as taxable interest each year. Amounts of $10 or more show up on Form 1099-OID.4Internal Revenue Service. About Form 1099-OID, Original Issue Discount
Dividend Income
Dividends appear on Form 1099-DIV and fall into two categories with very different tax consequences.5Internal Revenue Service. Instructions for Form 1099-DIV Ordinary dividends are taxed at your regular income rate. Qualified dividends are taxed at the long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income.6Internal Revenue Service. Topic No. 404, Dividends and Other Corporate Distributions
A dividend qualifies for the lower rate only if you held the stock more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. Days when your risk of loss was reduced through options or short positions don’t count toward that holding period.5Internal Revenue Service. Instructions for Form 1099-DIV
For 2026, the 0% rate on qualified dividends and long-term capital gains applies to taxable income up to $49,450 for single filers and $98,900 for married couples filing jointly. The 20% rate begins above $545,500 for single filers and $613,700 for joint filers. Everything in between falls in the 15% bracket.
If you own international stocks or funds, the foreign country may withhold tax on the dividends. You can usually claim a credit on your U.S. return for the foreign tax paid, reported on Form 1116, though many taxpayers with modest amounts claim it directly on Form 1040 without filing Form 1116. The credit is limited to the tax that actually qualifies; if a treaty entitles you to a reduced rate, only that treaty-rate amount counts. Box 7 of the 1099-DIV shows the foreign tax withheld.7Internal Revenue Service. Foreign Tax Credit
Capital Gains and Losses
Sell an investment for more than your basis and you have a capital gain. Sell it for less and you have a capital loss. The holding period decides how each is taxed.
Short-Term Versus Long-Term
Assets held one year or less produce short-term gains or losses. Held more than one year, they’re long-term.8Internal Revenue Service. Topic No. 409, Capital Gains and Losses Short-term gains are taxed at ordinary rates, which can reach 37%. Long-term gains get the 0%, 15%, or 20% rates. A single day can move a sale from one column to the other, so watch your purchase dates.
Netting Gains and Losses
Gains and losses net in a fixed order. Short-term losses first offset short-term gains; long-term losses offset long-term gains. If one category still has a net loss, it then offsets the net gain in the other.
When total capital losses exceed total gains for the year, you can deduct up to $3,000 of the net loss against ordinary income, or $1,500 if married filing separately. Any loss beyond that carries forward indefinitely and keeps its short-term or long-term character.8Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The Wash Sale Rule
You can’t sell a security at a loss and buy it right back to harvest the deduction. Under the wash sale rule, a loss is disallowed if you acquire the same or a substantially identical security within 30 days before or after the sale, a 61-day window in total.9eCFR. 26 CFR 1.1091-1, Losses From Wash Sales of Stock or Securities
The disallowed loss isn’t gone. It gets added to the basis of the replacement shares, deferring the loss until you sell those. If you’re harvesting losses at year-end, wait at least 31 days before repurchasing, or buy a similar but not substantially identical security, such as a different fund tracking a different index.
Which Forms Report What
Individual sales get reported on Form 8949, with the date acquired, date sold, proceeds, and basis for each transaction. That form lets you reconcile what your broker reported to the IRS on Form 1099-B with what you’re reporting yourself. Totals then flow to Schedule D, which calculates your overall net gain or loss.10Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
If your broker reported the correct basis to the IRS and you have no adjustments, some transactions can be reported directly on Schedule D. The Schedule D instructions spell out when that shortcut applies.
Worthless stock is treated as sold for zero on the last day of the tax year. Report it on Form 8949 like any other sale; if you’d held it more than a year by December 31, the loss is long-term.11Internal Revenue Service. Losses (Homes, Stocks, Other Property) A narrow exception exists for Section 1244 stock issued directly by a qualifying small business corporation, where up to $50,000 of loss ($100,000 on a joint return) can be treated as ordinary rather than capital.12Legal Information Institute. Section 1244 Stock Section 1244 does not apply to shares bought on the secondary market.
The 3.8% Net Investment Income Tax
Higher-income taxpayers owe an additional 3.8% Net Investment Income Tax on top of regular rates. It applies to the lesser of your net investment income or the amount your modified adjusted gross income exceeds these thresholds:13Internal Revenue Service. Net Investment Income Tax
- Married filing jointly: $250,000
- Single or head of household: $200,000
- Married filing separately: $125,000
Net investment income includes interest, dividends, capital gains, rental income, and royalties, minus the expenses properly allocable to that income. The thresholds are not indexed for inflation, so more taxpayers cross them each year as wages and returns grow. A married couple with $300,000 of modified adjusted gross income and $80,000 of net investment income would owe 3.8% on $50,000 (the lesser of the $80,000 or the $50,000 excess over $250,000), adding $1,900 to their bill. You calculate and report the tax on Form 8960.14Internal Revenue Service. Topic No. 559, Net Investment Income Tax
Investment Expenses: What You Can Still Deduct
If you borrow to buy investments, the interest is deductible as an itemized deduction, but only up to your net investment income for the year.15Office of the Law Revision Counsel. 26 USC 163 – Interest Net investment income for this purpose generally includes taxable interest and ordinary dividends, but not qualified dividends or long-term capital gains, unless you elect to treat them as ordinary investment income and give up the lower rate on those amounts. Interest expense you can’t deduct this year carries forward and is treated as investment interest paid the next year. You calculate it on Form 4952 and claim it on Schedule A.16Internal Revenue Service. About Form 4952, Investment Interest Expense Deduction
Financial advisor fees, investment newsletters, and safe deposit box rentals are a different story. Individuals could deduct these as miscellaneous itemized deductions before 2018 (subject to a 2% floor). The Tax Cuts and Jobs Act eliminated the deduction beginning in 2018 through 2025, and the One Big Beautiful Bill Act of 2025 made the elimination permanent.17Congress.gov. Tax Provisions in H.R. 1, the One Big Beautiful Bill Act For individual investors, those common management costs are not deductible going forward.