How to Handle Taxes on Investment Income

Learn how different types of investment income are taxed and how to organize your records for tax season.

1. Understand the three main types of investment income. Dividends are payments from companies you own stock in, taxed as ordinary income or at capital gains rates depending on whether they're qualified dividends. Interest from bonds, CDs, and savings accounts gets taxed as ordinary income at your regular tax rate. Capital gains happen when you sell an investment for more than you paid, and they're taxed differently based on how long you owned it.
2. Know the difference between short-term and long-term capital gains. If you sell an investment you've owned for one year or less, that's a short-term capital gain taxed at your ordinary income rate (up to 37% as of 2026). Hold it longer than one year before selling, and it becomes a long-term capital gain with lower tax rates. This timing difference can save you significant money on larger gains.
3. Track your cost basis for every investment. Your cost basis is what you originally paid for an investment, plus any fees or commissions. When you sell, you subtract this from the sale price to calculate your gain or loss. Most brokerages track this automatically, but keep your own records of purchase dates, amounts, and any reinvested dividends that increase your basis.
4. Use tax-loss harvesting to offset gains. If you have investments that have lost value, you can sell them to create capital losses that offset your capital gains dollar-for-dollar. You can deduct up to $3,000 in net losses against ordinary income each year, and carry forward additional losses to future years. Just avoid buying the same or substantially identical investment within 30 days to prevent wash sale rules.
5. Understand how tax-advantaged accounts work. Investments in 401(k)s, traditional IRAs, and HSAs grow tax-deferred, meaning you don't pay taxes on gains, dividends, or interest until you withdraw the money. Roth IRAs and Roth 401(k)s grow tax-free, so you never pay taxes on investment income inside these accounts. Regular taxable brokerage accounts generate taxable income each year even if you don't sell anything.
6. Organize your tax documents and report everything. You'll receive Form 1099-DIV for dividends, 1099-INT for interest, and 1099-B for investment sales from your brokerage by January 31st. Don't forget about dividends from reinvestment plans or interest from high-yield savings accounts. Report all investment income even if you didn't receive a 1099 form, as the IRS often gets copies of these documents.