Earned Money in Your Brokerage Account? Here's What You Need to Know About Your Taxes

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If you're sitting on profits from selling investments, read this carefully.

Key points

  • Investing money you don't need for immediate use is a good way to grow wealth.
  • Selling stocks at a profit can help tax implications, and it's important to know what income to report.

The money you have socked away for emergency expenses should be tucked away in a savings account. But for money you don't need for emergencies and you don't expect to use for many years, a brokerage account is a great home.

The upside of investing your money in a brokerage account is getting an opportunity to grow it into a much larger sum over time. And while there are risks involved, the returns your brokerage account delivers could well outpace the interest you receive in your savings account.

If you earned money in your brokerage account last year, it could have an impact on your 2021 tax return, which you'll need to submit by this year's April 18 filing deadline. Here's what you need to know.

You may owe the IRS some money -- or not

It could be that the value of your brokerage account balance grew in 2021 because you added money and investments to your account, or because your investments gained value. If your portfolio gained value but you didn't actually sell any stocks, then you won't owe the IRS money. Rather, you're only required to pay the IRS taxes on capital gains, which kick in when you sell an asset like a stock or bond for a higher price than what you paid for it.

Let's say your brokerage account balance was $3,000 at the start of 2021, and you did nothing during the year but sit back and watch it grow. If, by the end of 2021, your balance was $3,200, due solely to capital appreciation and no stock sales, that doesn't create any tax obligation for you.

On the other hand, if you sold 10 shares of a stock you bought for $50 apiece at $70 apiece, you're looking at a $20 gain per share, or a $200 gain total. That $200 gain is something you'll need to report to the IRS and possibly pay taxes on.

How to know what brokerage income to report

It's not just capital gains you need to report to the IRS. You'll also need to tell the IRS if you earned income in the form of interest payments or dividends.

Luckily, your brokerage account should make it easy for you to convey that information, as well as information about capital gains. That's because brokerages are required to provide account holders with tax forms that hit on all of these areas. Here are some specific forms to look for, whether in the mail, via email, or by logging into your account:

  • Form 1099-B, which you'll use to report capital gains
  • Form 1099-INT, which you'll use to report interest income from bonds (you might also receive this form from your bank to report interest earned in a savings account or CD)
  • From 1099-DIV, which you'll use to report dividends

All told, there's really no need to stress over what information you need to give the IRS, because your brokerage account should package it up neatly for you. It's a simple matter of copying over the right details to your tax return.

That said, if you're looking at a substantial amount of capital gains, you may want to consult a tax professional before filing your return. You should also know if you sold assets at a loss last year, you may be able to use that loss to offset your gains, so don't assume you'll be writing the IRS a massive check.

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