The Stock Investment Reporting Guide for Tax Professionals

Your clients are likely to have inquiries concerning the tax consequences of stock investments. With some familiarity with capital gains taxes, capital loss deductions, and dividends taxes, you should be able to answer their queries. Here are some of the things you should be knowledgeable about.

Taxes on Capital Gains

The capital gains tax is the most prevalent stock investment tax and is only due in the event of a profit. That is to say, and your clients will not owe any capital gains taxes on any appreciation in the quality of their stock holdings until and until they sell the stock and “realize” that gain.

A stock’s loss or gain is determined by its selling price less its cost basis.

●     Long-Term Capital Gains

Investments maintained for more than a year are taxed at the long-term capital gains rate of either 20 percent, 15 percent, or 0 percent, depending on your client’s modified adjusted gross income.

Long-term rates are always preferable, so you may suggest that clients keep their stock investments for at least a year to reap the maximum benefit.

●     Short-Term Capital Gains

The short-term capital gains tax applies to profits made on investments held for less than a year. This percentage is equivalent to the tax rate your client is in.

Accounting for Capital Losses

Your clients can reduce their annual capital gains tax bill by the amount of any losses they incur when selling stock assets. One could deduct up to $3,000 ($1,500 if filing separately) in capital losses from their yearly taxable income if they experienced a net capital loss (meaning their losses exceeded their gains for the year).

They can defer losses over the $3,000 threshold to subsequent tax years. Each year, until the loss is fully deductible, the individual can utilize the loss to offset any net capital gains or deduct up to $3,000 in taxes.

Stock Dividends Are Subject to Taxation

Dividends are distributions of a company’s profits to its shareholders. Clients with substantial stock market exposure may not get any dividend income since not all firms choose to pay dividends.

The vast majority of dividends will be “ordinary dividends,” which are taxed at the same rate as your client’s salary. Depending on their modified adjusted gross income, your client may be able to deduct either zero, 15 percent, or 20 percent of long-term capital gains tax on qualifying dividends.

Your client must file Form 1099-DIV if they received dividends of more than $10 in a given year. You should read IRS Publication 550 to learn more about dividends that are not qualified. The payment is not a qualified dividend even though it is reported in box 1b.

For your client to have satisfied the holding period, they must have held the shares for at least 61 days of the timeframe of 121 days, starting 60 days before the ex-dividend time. The ex-dividend period is the first trading day after a dividend announcement on which a stock purchase will not be qualified to receive the subsequent dividend payment.

You may learn more about this topic by reading Publication 550 of the Internal Revenue Service.

Investments in a Retirement Account

Retirement account stock holdings are subject to a different set of tax rules than those that apply to other types of investment accounts. For tax purposes, the money you withdraw will be considered ordinary income. Roth 401(k) and Roth IRA contributions are subject to income taxes at the investor’s standard rate at the investment time.

How Do You Document Your Stock Holdings?

Your broker will send you a 1099-B at the end of the year to report your gains or losses. You will use the information on your clients’ 1099-Bs to calculate their capital gains or losses on IRS Form 8949, Sales and Other Dispositions of Capital Assets.

Your client should have gotten a Form 1099-DIV from the company if they were entitled to dividends on Form 1040, line 3.


With the information you have gathered, you’ll be better equipped to engage your clients and process any refunds for them. Beyond answering questions, you can take advantage of different software that would help you process your returns by using advanced software.

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