The Tax Preparer’s Guide to Reporting Stock Investments

A woman in a blue shirt sitting at a desk calculating tax on a piece of paper.

Whether your clients are brand new to investing or already have a large portfolio, they’re bound to have questions about how their stock investments impact their taxes. While there are plenty of special situations to be mindful of, you can typically answer their questions with basic knowledge of capital gains taxes, capital loss deductions, and dividends taxes.

Here’s what you need to know to educate your clients and handle their returns.

Capital gains taxes

The most common type of stock investment tax is the capital gains tax, which applies only when a gain has been realized. In other words, even if your clients’ stock investments have significantly increased in value, they aren’t liable for any capital gains taxes until they sell the stock and “realize” that gain. 

Gains or losses are calculated by subtracting the stock’s cost basis from its value at the time of sale.

Short-term capital gains

Investments that have been held for a year or less will be subject to the short-term capital gains tax. This rate is the same as your client’s income tax bracket rate. 

Long-term capital gains

Investments that have been held more than a year are subject to the long-term capital gains tax rate of 0%, 15%, or 20%, depending on your client’s modified adjusted gross income. The long-term capital gains rates for 2022 are as follows:

Filing Status0%15%20%
SingleUp to $41,675$41,676 – $459,750$459,751+
Head of householdUp to $55,800$55,801 – $488,500$488,501+
Married filing jointlyUp to $83,350$83,351 – $517,200$517,201+
Married filing separately Up to $41,675$41,676 – $258,600$258,601+

It’s almost always more beneficial to pay the long-term rate, so you may want to advise your clients to hold their stock investments for over a year whenever possible.

Deducting capital losses

When your clients sell stock investments at a loss, they should deduct the amount from their capital gains for the year. If they had a net capital loss (i.e. their losses exceeded their gains for the year), the loss can be used to deduct up to $3,000 per year from their taxable income ($1,500 if married filing separately). 

If they have more than $3,000 in losses, they can carry over the excess over to future tax years. The carryover loss can once again be used to reduce net capital gains or to deduct up to $3,000 from their taxable income each year until the full amount of the loss has been deducted.

Taxes on dividends

If your client hasn’t sold any stock holdings during the year, they won’t be subject to capital gains taxes, but they could still face taxes on dividends. Dividends are company profits that are paid out to shareholders. (Note that not all companies choose to pay dividends, so even clients who are heavily invested in the stock market may not have any income from dividends).

Most dividends are known as ordinary dividends, and they’re taxed at the same rate as your client’s income tax bracket. Certain dividends, known as qualified dividends, are taxed at the long-term capital gains tax rates of 0%, 15%, or 20%, depending on your client’s modified adjusted gross income. To be “qualified,” a dividend must be paid by a U.S. corporation or qualified foreign corporation, and your client must meet the holding period for owning the stock*. 

Your client should receive a Form 1099-DIV for any dividends exceeding $10. Typically, ordinary dividends are shown in box 1a and qualified dividends are shown in box 1b. However, you should review the section titled “Dividends that are not qualified dividends” in IRS Publication 550. Dividends listed here are not considered qualified dividends even if they are shown in box 1b. 

*To meet the holding period, your client must have held the stock for at least 61 days of  the “121 day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment.” See IRS Publication 550 for more details.

Investments in retirement accounts

Stock investments that exist inside retirement accounts such as 401(k)s and IRAs  have their own tax rules. Your clients will not pay taxes on any money invested in traditional 401(k) and IRAs until they begin to withdraw money from the account. The withdrawn amounts are then taxed as ordinary income. Money invested in Roth 401(k)s and Roth IRAs is taxed as ordinary income at the time of the investment and is not taxed at the time of withdrawal.

What forms are used to report stock investments?

Your  client should receive a Form 1099-B from their broker for any gains or losses during the year. You’ll use the information from their 1099-Bs to calculate their capital gains or losses on Form 8949, Sales and Other Dispositions of Capital Assets. Then, you’ll report then summarize gains and losses on Schedule D (Form 1040), Capital Gains and Losses and report them on line 7 of Form 1040. 

If your client had any dividends, they should have received a Form 1099-DIV from the corporation. You will report them on line 3 of Form 1040. 

TaxSlayer Pro greatly simplifies the process of calculating and reporting capital gains, losses, and dividends. Once the information from your clients’ 1099s has been entered, your software will guide you through the calculations and automatically enter final amounts onto their 1040. 

This article was last updated on 06/27/2022.