Taxes with Brokerage Accounts
Summary of User’s Concern and Solutions Discussed:
- The user, Storm, is concerned about the tax implications of investing, particularly in index funds, and wants to avoid making mistakes that could lead to owing taxes.
- FidelityAidan explains that tax liability varies depending on whether investments are made in retirement accounts (like IRAs, which have tax-deferred growth) or non-retirement (taxable) accounts.
- For non-retirement accounts, capital gains tax applies when selling securities, with short-term gains being taxed as ordinary income and long-term gains at a lower rate.
- Storm is advised to consult with a qualified tax professional for personalized advice and to refer to Fidelity’s educational resources for further information on managing taxes.
Here’s the full thread
Hello, I hope whoever is reading this is having a good day! I am very new to investing and newly 18, I set up a brokerage account recently and wanted to start investing. I mainly just want to invest in index funds that track the S&P 500 and I was wondering before I do anything. What are all the tax related things I have to do with investing? Does it open a door to a whole bunch of new craziness with tax stuff that is new like regular taxes? I just don’t want to do anything wrong and end up owing something or doing something wrong. Is there an easy to digest resource for this? Any help would be greatly appreciated!
Hey there, @Storm. Thanks for dropping by this afternoon. We can certainly take a look into the basics of taxes. Let’s jump in.
It’s important to remember that tax liability on securities depends on whether you’re investing in a retirement account or a non-retirement account. Regardless, I’ll provide some general information on the taxability of both account registrations.
First up, retirement accounts. In short, there are no taxes or penalties for trading within an IRA account. Easy, right? IRAs and 401(k)s offer tax-deferred investment growth, meaning you’ll generally only be on the hook for taxes when you withdraw from the account.
Next up, we’ve got non-retirement brokerage accounts, or “taxable” accounts. Hence the name, interest, dividends, and stock sales may have tax implications. However, a withdrawal from the account is not reportable or taxable. When you sell a stock or a mutual fund, Fidelity will not automatically take taxes out right away; rather, applicable tax forms will be generated depending on the type of investment activity within your account.
Fidelity doesn’t provide tax advice. We always encourage customers to consult with a qualified tax professional regarding their personal situation. However, we do have a number of great articles and videos on http://Fidelity.com that can help illuminate this area a little more. Take a look at a few I’ve linked below.
Dividends and Taxes: https://www.fidelity.com/learning-center/investment-products/stocks/dividends-and-taxes
Managing Taxes: https://www.fidelity.com/learning-center/personal-finance/managing-taxes/managing-taxes-learning-path
Now for the term of the hour, capital gains. What are these? They are simply the realized profit made when you sell a security for more than your purchase price, also known as your cost basis. Proceeds are reported in the year in which the sale occurs on Form 1099-B, which you’ll receive from Fidelity.
How long you’ve held an investment also plays into any taxes you may owe when you sell it. Short-term gains made on investments held for one year or less are taxed as ordinary income, while long-term gains on securities held for longer than one year are generally taxed at a lower rate. As far as how to file this, we again recommend speaking with a tax advisor.
Let us know if you have any questions going forward. We’ll see you around!
Thank you!
when you sell your investment in a taxable brokerage, you realize the capital gains. If the investment is held for less than a year it’s short term and you’ll pay more in capital gains. If you hold it for more than a year then it’s long term and you’ll owe less capital gains tax. you pay capital gains tax on the earnings of your investment and the % you’ll owe is based on income, single/married and stuff like that. There’s a chart in that site
that would be for a regular taxable brokerage ^. But then you have tax advantaged accounts like IRA’s which is different