A Simple Tax Checklist for Organizing Your Investments

Tax season is just around the corner. This means you need to start gathering the documents you need to file your tax return. Most people know the basic forms they need to file: W-2 forms for traditional employees and 1099 forms for contract workers.

But if you're an investor, there are some additional forms you need to have to accurately file your tax return. It's important to know ahead of time which forms you'll need, as well as how each of your investments will affect your tax liability. Here's our simple tax checklist to help you make sure you have everything you need come tax day.

Things to Keep in Mind Before You File Your Tax Return

For many Americans, tax season brings up a lot of emotions. On the one hand, many people end up getting a tax refund, which can be exciting. However, there's always the underlying anxiety that you'll end up owing money or somehow make a mistake as you're filing your return.

The best way to go into tax season with confidence is to understand exactly what's expected of you. That way, there will be no surprises and you can feel confident filing your return (or having your tax professional file it on your behalf) knowing you haven't made any errors.

The first thing to remember is when your taxes are actually due. Tax day is usually April 15 unless it falls on a weekend or a federal holiday. Because April 15, 2023, is Emancipation Day in Washington, D.C., taxes this year are due April 18. But you don't have to wait that long to file — the IRS began accepting returns on January 23.

While the default deadline to file your tax return this year is April 18, you can file for an extension. The deadline for taxpayers who file an extension is October 16, 2023.

But be warned: An extension for your tax return doesn't extend the due date for your taxes owed. If you will owe tax, the IRS still requires that you pay it by April 18.

In addition to knowing when you need to file, you should also go into tax season knowing what forms you need. And if you need help figuring out your taxes, don't hesitate to reach out to a professional or choose a tax software platform with built-in assistance.

Tax Checklist: Required Information

Information about your income and deductions that you need for filing includes:

• Employment income
• Investment income
• State government income (e.g., tax refunds or unemployment)
• Taxable alimony
• Business or farming income
• Retirement income
• Income from property sales
• Other miscellaneous income
• Income adjustments, deductions and credits

For the purposes of this article, we'll be focusing on investment income. We'll talk about the different types of investment income you may have, what forms you need and how much you can expect to pay in tax on these types of income.

Find out more >>> What First-time Investors Need to Know About Filing Taxes

Interest and Dividend Income

Interest and dividend income are two of the most common types of investment income. In fact, even if you don't have an investment account, you still may have income that falls into this category.

You may have earned interest throughout the year if you have money in a savings account, certificate of deposit (CD) or a similar bank account that accrues interest. If you have taxable interest income, you'll receive a 1099-INT.

Dividend income on the other hand is income earned from your stock holdings. Many companies pay shareholders dividends as a way of passing along some of their profits to their owners. The benefit of dividends for shareholders is that they act as an additional source of income. But as income, you have to pay tax on that money. This is true even if you've chosen to reinvest your dividends. If you've received dividend income throughout the year, you'll get a 1099-DIV form.

It's worth noting that the income on your 1099-INT forms will likely be taxed as ordinary income. But the tax treatment for your dividend income depends on whether they are ordinary or qualified dividends. Ordinary dividends are taxed as ordinary income. But on qualified dividends, you pay tax at capital gains tax rates, which we'll cover later.

Find out more >>> What's the Deal With Capital Gains on Stock?

Cryptocurrency Investments

According to the IRS, cryptocurrencies are treated as property rather than currency for tax purposes. Because of that, buying and selling cryptocurrency results in tax consequences similar to buying and selling stocks.

If you sold cryptocurrency — or any other asset, for that matter — in the previous tax year, there are two forms you need to know about: Schedule D and Form 8949 [PDF].

Schedule D is the IRS tax form where you report the sale or exchange of any capital assets that aren't reported on another form or schedule. You separately report short-term and long-term gains and losses. (Short-term refers to gains and losses on assets you've held for one year or less. Long-term refers to gains and losses on assets you've held longer than one year).

Schedule D is where you summarize your total gains and losses. On Form 8949 you list each transaction — cryptocurrency transactions, in this case — to calculate your total gains and losses.

Find out more >>> Tax Guide to Cryptocurrency Investments

Form 8949 Requirements

On Form 8949, you have to report:

• A description of the asset
• The date you acquired it
• The date you sold it
• The sale price
• Your cost basis (meaning the amount you paid for it)
• Adjustments to your gain or loss
• Your total gain or loss for that asset

Once you've added each transaction, calculate your net capital gain or capital loss for the year. As with Schedule D, you report short-term gains and losses separately from long-term ones.

These tax forms are specifically for cryptocurrencies you sold, whether it was for a gain or a loss. But you could face other tax consequences for other types of cryptocurrency transactions.

For example, if you mined cryptocurrency and earned coins as your reward, you should receive Form 1099-NEC.

You also pay tax on the cryptocurrency you receive as payment for goods and services, just as you would for regular currency received.

A final characteristic that sets cryptocurrency apart from traditional currency is that you pay tax not just when you sell it but also when you spend it.

Investment Partnerships

A partnership is a type of pass-through entity. This means the owners, not the business itself, pay taxes on the business income. If you're part of a business partnership, then you're on the hook for your share of the business's tax liability.

Each year, such businesses must prepare a Schedule K-1 for each partner. This form provides the information you need to file your tax return. It includes your share of the business income, losses, deductions, and credits. You then use that form to file your annual tax return.

This tax treatment of partnerships is beneficial to the owners. Rather than the income being taxed twice — once at the business level and again when you receive your share as income — it's taxed only once. The downside is that it means you have to report your entire share of the business's income, even if it wasn't distributed to you.

Be careful as you're filing your tax return because not all income on Schedule K-1 is the same type of income, nor is it all taxed the same way. Types of income that can be included in the form include:

• Ordinary business income
• Net rental real estate income
• Other net rental income
• Guaranteed payments for services
• Interest income
• Ordinary dividends
• Qualified dividends
• Royalties
• Short-term capital gains
• Long-term capital gains
• Collectibles
• Unrecaptured section 1250 gain
• Net section 1231 gain
• Other income

Investment Real Estate

If you own real estate, you have to provide tax forms and pay tax on your income. And unfortunately, the tax consequences of this type of investment are even less clear than that of other investments.

First, you have to pay tax on any rental income you collect from your investment. In addition to rental income, other types of income you have to report include security deposits you don't return to the tenant, payments for canceling a lease, expenses paid by your tenant, and property or services rendered by your tenant, perhaps in exchange for rent. These forms of real estate income are taxed as ordinary income.

The good news is that you can offset your real estate income with deductions. Real estate expenses that you can deduct from your taxes include mortgage interest, property taxes, operating expenses, depreciation and repairs. You report these incomes and deductions on Part 1 of Schedule E.

You may also have tax consequences from selling any investment real estate you owned. Real estate is treated the same way as other assets for tax purposes, meaning you pay capital gains tax on the difference between your cost basis in a property and the amount you sold it for. And while your primary residence has special tax treatment that allows you to avoid or minimize capital gains tax, this special treatment isn't available for investment properties.

Calculating your capital gain for real estate isn't as simple as subtracting the amount you bought it for from the amount you sold it for. Other expenses you incurred can increase your cost basis, which reduces your capital gains tax. Those expenses include legal fees, real estate commissions and value-adding improvements. And don't forget about depreciation, whether or not you claimed it while you owned the property.

Find out more >>> Real Estate Depreciation – A Tax Deduction That Rental Property Investors Love

Capital Gains and Losses

We've touched on the idea of capital gains and losses a few times throughout this guide, and now it's time to explain what that actually means.

A capital gain occurs when you sell an asset for more than your cost basis in it (i.e., you sell it for a profit). You can experience a capital gain on just about any property, including real estate, stocks, cryptocurrency, household furnishings, collectibles, and art.

And as we've mentioned in this article, the IRS requires that you pay tax on all capital gains. The amount you pay depends on how long you held the asset.

A short-term capital gain is when you sell an asset for a profit after holding it for one year or less. Short-term capital gains are taxed as ordinary income, meaning you pay a rate somewhere between 10% and 37% (the lowest and highest income tax rates).

A long-term capital gain is when you sell an asset for a profit after holding it for more than one year. Long-term capital gains have a more favorable tax treatment. Rather than being taxed at your ordinary income tax rate, you'll be taxed at one of three special capital gains tax rates, depending on your income.

Individuals with income up to $41,675 will pay a 0% tax rate on their capital gains. Individuals with income from $41,676 to $459,750 will pay 15%, and individuals with income of $459,751 and up will pay 20%.

Find out more >>> What Are the 2022 and 2023 Capital Gains Tax Brackets?

Capital Losses Offset Capital Gains

The good news is that you can offset your capital gains with capital losses, which occur when you sell an asset for less than your cost basis. So if you had a $500 capital gain on one asset and a $500 capital loss on another asset, your net capital gain on these two assets is actually $0 and you won't be on the hook for any capital gains tax for them.

The IRS also allows you to deduct from your regular income $3,000 of capital losses above and beyond your capital gains. And this means you can lower your tax liability even further. Finally, if your net losses exceed $3,000, you can carry the loss forward to reduce your capital gains tax liability in future years.

Investment Expenses

Just as you have to claim investment income on your tax return and pay tax on it, the IRS also previously allowed you to claim deductions for certain investment expenses, which can reduce your tax burden. However, this has changed.

The Tax Cuts and Jobs Act (TCJA) passed in 2017 eliminated investors' ability to deduct most miscellaneous expenses from tax years 2018 to 2025. Investment costs you could previously deduct included attorney and accounting fees, services charges for dividend reinvestment plans, broker fees, and revocable trust fees.

While you can't deduct these miscellaneous investment expenses now, there are still some investment expenses you can use to reduce your tax burden.

First, you can deduct investment interest expenses, including the interest you pay on margin loans to buy stocks and other assets in your brokerage account. But this deduction is available only if you itemize your deductions.

The federal tax law also still allows you to deduct business interest expenses, which include the interest paid on business loans and credit cards. But since the passage of the TCJA, there's been a cap on the amount you can claim for business interest. This limit doesn't apply to small business loans, where you can deduct the full interest amount.

The Bottom Line

If you're an investor, you may face certain tax consequences for your investments. Taxes apply to dividends, interest, capital gains, real estate income, and other investment income. Luckily, you can offset some of your investment income with losses and deductions. It's important to keep a tax checklist so you can see what you need to report.

But remember that investors may not have to pay taxes on all their investments. Retirement accounts like 401(k) plans and individual retirement accounts (IRAs) allow your investments to grow either tax-deferred or tax-free. You won't be on the hook for capital gains tax or tax on any dividend income you earned in these accounts.

Understanding your tax situation and filing your tax return is crucial, and mistakes can cost you dearly. If you have questions about your tax return or aren't sure how to file certain forms or report certain types of income, consult a tax professional (such as TurboTax) who can guide you through the process.