Taxes on investing

You may owe tax when you sell for a profit or receive dividends. How long you hold makes a big difference.

When you owe tax in a regular account

Selling for a profit creates a realized capital gain. If your investment has risen but you haven't sold, there's no tax yet.
Dividends and interest are generally taxable in the year you receive them, even if they're automatically reinvested.

Inside retirement accounts like IRAs and 401(k)s, these day-to-day gains and dividends aren't taxed each year. Taxes (if any) depend on the account's rules when you withdraw.

Short-term versus long-term gains (US)

US federal rules in brief. State taxes may also apply.
	Short-term	Long-term
Held for	One year or less	More than one year
Taxed like	Regular income, at your normal rate	Lower special rates: 0%, 15% or 20% depending on income

This is one more reason frequent trading tends to cost more: gains are more often taxed at the higher short-term rate. Losses can offset gains, and some leftover losses can reduce other income, within limits.

Taxes for young investors

If you're a minor (or a full-time student under 24), investment income above a certain amount can be taxed at your parents' rate, under what's called the “kiddie tax”. Keep it in mind if you have a large custodial account.

Key takeaways

In taxable accounts, you owe tax on dividends and on profits when you sell.
Holding more than a year usually means a lower tax rate on gains.
Retirement accounts shelter growth from yearly taxes.

Key terms

Capital gain: The profit when you sell an investment for more than you paid. It's taxable in regular accounts once you sell.
Dividend: A share of a company's profits paid to its shareholders, often every quarter. Not all companies pay them.
Roth IRA: A US retirement account funded with after-tax money. Qualified withdrawals in retirement, including growth, are tax-free.

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