Chapter 10:  Taxes on Investments in a Brokerage Account

10.0 Introduction

            Compared to tax sheltered accounts, (e.g. 401(k) plans), brokerage accounts allow for maximum liquidity.  Investors can move funds in and out of a brokerage account with ease.  This is a huge benefit, especially for young investors that may be saving money for a new car, house downpayment, or other major expenses. But the added liquidity comes at a cost—taxes. 

10.1 Capital Gains Taxes

            For stock investors, there are two situations that can trigger a taxable event:  Earning a dividend or selling stock.  And there are two tax brackets to consider:  Income Taxes (you already know about these) and Capital Gains Taxes.  Capital Gains Taxes are a special type of tax that sometimes apply to revenues or profits generated from the ownership of stocks, real estate properties, and other assets.  Before providing specifics, we need to first get a taste of how capital gains taxes are applied.  The table below shows the income and capital gains tax brackets for a single individual in 2025.  Click here for other tax tables.

Using the table above, let’s try to solve for the capital gains taxes in the example below.  I’m guessing Donnie Dumbass will have trouble with this one.  He is a dumb ass.

Example 1:  Sandria is single and earns an income of $62,000 from her job as an accountant.  She also earns $20,000 in capital gains.  Solve for her capital gains taxes in 2025.

Every semester, several (usually very lazy) students will make the same mistake as Donnie.  And I understand why.  This is a tricky little concept when you first see it.  

  To correctly solve capital gains taxes, you must first consider one’s income—this is always the first step. Sandria has $62,000 in income.  Any capital gains will be taxed “on top” of this value at the capital gains tax rate.  In other words, her capital gains will not be applied from $0 to $20,000.  Rather, her capital gains ranges from $62,000 to $82,000 and she will pay $3,000 in capital gains taxes ($20,000*0.15).  This is confusing.  My image below is an attempt to show how this works.

Let’s do some more examples and hopefully this idea will click.  Assume that each of the following individuals are single.

Example 2:  Maura earns $880,000 in income and $60,000 in capital gains.  Solve for her capital gains taxes.

Solution:  Her capital gains will be applied in the $880,000 to $940,000 range.  She is in the 20% bracket and will pay $12,000 in capital gains taxes.

Example 3:  Andrew earns $41,000 in income and $6,000 in capital gains.  Solve for his capital gains taxes. 

Solution:  His capital gains will be applied at the $41,000 to $47,000 range.  He is in the 0% bracket and will pay $0 in capital gains taxes.  So capital gains earnings do not always cause capital gains taxes.

Example 4:  Devin earns $48,000 in income and $1,000 in capital gains.  Solve for his capital gains taxes. 

Solution:  His capital gains will be applied in the $48,000 to $49,000 range.  He is in the 0% bracket on the first $350 in capital gains.  The remaining $650 in capital gains falls in the 15% bracket.   Capital gains taxes = $650*0.15 = $97.50

If this does not make sense, I implore you to watch the lecture video.  This is a lot easier to explain orally than with written words.

10.2 Taxes on Dividends

            As discussed in Chapter 4, most companies periodically reward stockholders with dividends.  As a shareholder, this isn’t necessarily good since dividend payouts create a taxable event when you own stocks in a brokerage account.  But there isn’t much you can do about it (unless you only target companies that don’t pay dividends, which is probably a bad idea).  Whether you hold individual stocks, mutual funds, or index funds, you will likely receive sporadic dividend payments.  Here are the rules regarding dividends in a brokerage account.

·       If you have held the stock for 60 days or less when a dividend is earned, your dividend will be taxed as income.  This is called an ordinary dividend.

·       If you have held the stock for more than 60 days when a dividend is earned, your dividend will be taxed as capital gains.  This is called a qualified dividend.[1]

You should always prefer to pay a capital gains tax rather than an income tax so it’s generally better to hold stocks for a long period of time before selling.  To make sure we understand the implications, consider the following examples:

Example 5:  Ivy earns $30,000 in income as a part-time worker.  In 2025, she earns $800 in dividends for stocks that she has held for 30 days in a brokerage account.  Solve for the taxes paid on her dividends.

Solution:  Her dividends will be taxed as income, assessed at the 12% marginal tax rate.  Tax on dividends = $800*12% = $96

Example 6:  Annabelle earns $30,000 in income as a private school teacher.  In 2025, she earns $800 in dividends from an index fund that she has held for 180 days in a brokerage account.  Solve for the taxes paid on her dividends.

Solution:  Her dividends will be taxed as capital gains.  But, given her income, she is in the 0% capital gains tax bracket and will pay no capital gains taxes.  Note that taxable events do not always trigger taxes to be paid.

Example 7:   Kenya earns an income of $515,000 as a professional soccer player.  In a brokerage account, she earns $5,000 in ordinary dividends and $15,000 in qualified dividends.  Solve for the taxes paid on her dividends.

Solution:  The $5,000 in ordinary dividends are taxed at 35% ($1,750).  Since her total income is $520,000, she is in the 20% tax bracket for capital gains.  So she will pay $3,000 in taxes on her qualified dividends.  Her total taxes paid on dividends will be $4,750

10.3 Taxes on Stock Profit

            Selling stocks for a profit also triggers a taxable event, whether you are selling individual stocks, a mutual fund, or an index fund.  Here are the rules:

·       If you sell stock that you have held for one year or less, the profit is taxed as income.  This is sometimes called a short-term gain.

·       If you sell stock that you have held for more than one year, the profit is taxed as capital gains.  This is sometimes called a long-term gain.

In a given year, you might have many transactions.  For example, you might have one long-term stock profit of $300 and one long-term stock loss of $200.  In this case, this person would have $100 in long-term gains.  More examples…

Example 8:   Jason earns an income of $65,000 as a restaurant manager.  In a brokerage account, he sells stock that he bought 4 years ago.  He originally paid $600 for the shares.  He sells them for $5,200 today.  He also sells shares that he bought just two weeks ago; he paid $2,000 and sells them for $4,400.  Solve for his taxes paid on his investments only.

Solution:  Jason has $2,400 in new income from his investments.  He will be taxed at the 22% rate.  $2400*0.22 = $528.  He has $4,600 in capital gains, which is taxed at 15%.  $4,600*0.15 = $690

Example 9:   Ernesto earns an income of $115,000 as an accountant.  In a brokerage account, he sells shares of an index fund that he bought 9 months ago.  He originally paid $4,000 and he sells the shares for $5,800 today.  He also sells stock that he bought 2 years ago; he paid $1,400 for the shares and sells them for $800 today.  He also earns $500 in ordinary dividends and $800 in qualified dividends.  Solve for his taxes paid on his investments only.

Solution:  Let’s piece this together.  Ernesto earns an income of $115,000 as a professional as an accountant.  In a brokerage account, he sells shares of an index fund that he bought 9 months ago.  He originally paid $4,000 and he sells the shares for $5,800 today ($1800 in new income).  He also sells stock that he bought 2 years ago; he paid $1,400 for the shares and sells them for $800 today (-$600 in capital gains).  He also earns $500 in ordinary dividends ($500 in income) and $800 in qualified dividends ($800 in capital gains). 

o   Investment Income = $2,300; $2,300(0.24) = $552

o   Capital Gains = $200; $200(0.15) = $30

o   Total investment taxes = $582

I could give you more examples and continue to explain all the interesting little wrinkles that can occur with such questions, but I’ll stop here.  You must work through some practice problems to understand this material. 

            But there is one final stock-tax topic that deserves attention.  After all your stock transactions are considered, what if you lost money.  For example, maybe you bought shares of AIG stock in 2008 for $5,000 and sell those shares for $3,000 today and this was your only transaction this year.  How is a $2,000 loss handled?  Believe it or not, this person could count this $2,000 loss against their income!  If they had, say, $100,000 in income from their job, their taxable income would now only be $98,000.  There is a limit of how much can be deducted ($3,000 as of 2024), but losses can be carried forward to future years’ taxes.  Shrewd investors, who don’t mind a little extra work, will intentionally sell stock that is losing value to “lock-in” their losses to reduce taxes.  This practice is called tax loss harvesting.  This is a tricky subject that might save you a few hundred dollars per year if you have a substantial amount of money invested within a brokerage account.  In the future, I will link a full article about tax loss harvesting here.

10.4 Taxes on Profits from Bonds

  When investing in a brokerage account, most bonds—Federal government bonds and Corporate bonds—are taxable and subject to either income taxes or capital gains.  While I could go into significant detail on the exciting world of bond taxes, I'm going to save you the agony.  In a brokerage account, bonds are treated less favorably than stocks from a tax standpoint.  So, any bonds you hold should typically be placed inside tax shelters, where the specific rules of bond taxes are not relevant.[2] Thus, a typical reader of this book can spend their entire lives never having to worry about the rules related to bond taxes since their bonds are held in tax sheltered accounts like 401(k) and IRA plans.  

  But there is one exception that might interest specific investors—municipal bonds.  Municipal bonds, which are bonds issued by local and state governments, are not taxed by the Federal government.  Because all investors like the idea of buying tax-free bonds, these local and state governments can find lenders at relatively low rates.  For example, a municipal bond might pay 4% while a comparable corporate bond pays 5.5%.  Thus, the tax savings are, to some extent, “priced-in” to the interest rate.  But not everyone pays the same tax rate, so the merit of municipal bond investing is a function of your tax bracket.  Rich people have the most to gain by investing in municipal bonds since these bonds allow them to avoid paying very high-income tax rates.  Furthermore, wealthy people are more likely to reach their tax-sheltered contribution limits and will need to hold bonds in a brokerage account.  So, if you get very rich, this is a topic to consider.  For now, I don’t think you need to waste too many brain cells thinking about bond taxes.

10.5 When Do You Pay These Taxes?

            If you work as an employee, you will likely pay taxes throughout the year.  Every time you earn a paycheck, your employer will withhold some of your income to pay taxes.  For example, you might earn a paycheck of $6,000 each month, but your business will retain about $800 to give to the federal government.  In the early part of the following year, you will file your income taxes to determine if you overpaid (due a refund) or underpaid (required to pay more).  In most cases, the taxes withheld by your employer will be close to what you actually should have paid so most years you will owe a bit more taxes when you file or earn a small refund.[3]

            Investment income, however, is not connected to an employer.  If you earn $20,000 in capital gains during the year, you will pay no taxes on these earnings until you file your taxes (last legal date to file is April 15th the following year).  For a typical tax filer, this might mean $3,000 in taxes that you are required to pay all at once when you file.  For new investors, this can be a shocking realization.  It is crucial that you understand the tax system so that you have a realistic expectation of how much taxes you will owe when you file.

            If you work with a typical brokerage vendor (e.g. Charles Schwab, Fidelity, etc.), you will not be responsible for keeping track of every transaction on your own.  Rather, your vendor will track all your transactions.  You can then aggregate these transactions yourself or enter them into tax software (e.g. TaxSlayer, TurboTax, etc.) if you’re willing to pay a couple-hundred bucks for easy tax preparation.  Even though some of the work may be managed by these entities, you still need to understand the tax system so that you can minimize your lifetime tax cost and be prepared to make any necessary tax payments when you file.

10.6 What about Social Security and Medicare Taxes?

How about some good news for a change?  Investment earnings, in virtually all scenarios, are not subject to Social Security or Medicare taxes.  Instead, as we will learn in more detail in chapter 17, Social Security and Medicare taxes only apply to employment wages.  So, if a single person has $100,000 in wages from their job, they will pay $6,200 in Social Security taxes and $1,450 in Medicare taxes, regardless of earnings in brokerage accounts.

10.7 Conclusions

            Unnecessary taxes can stunt the growth of your net worth.  For example, suppose you pay $1,000 in capital gains taxes when you are 30 years old.  That’s a nice chunk of change, but the long run cost is even more substantial.  Had that $1,000 remained invested, it could have grown to $45,000 by the time you are 70.[4]  Now imagine you are able to avoid $1,000 taxes every year!  Proper tax planning alone might be enough to push your retirement forward several years compared to a less savvy investor.  While most need a brokerage account to provide liquidity, financially skilled investors will try to use their tax shelters as much as possible to skip-out on investment taxes.

End Notes

[1] Technically it’s a bit more complicated, but I wouldn’t worry about the specific details.  While you will pay dividend taxes many times over your life, long-term investors do not need to worry too much about the specific tax rules.  Source for more info:  How Long Do You Have to Own Stock to Get Dividends? (marketrealist.com). 

[2] Inside a tax shelter, all assets are treated the same for tax purposes.  For example, if you make a withdraw money from a Roth IRA after age 59.5, you will pay no taxes at all, regardless of what assets you held in the account.

[3] The exception is when you have a major life event—divorce, new child, etc.  Unless you notify your employer of this life change, your employer will likely withhold too much or too little money, leading to a large discrepancy between what you have automatically paid during the year and how much you should have paid.

[4] Assuming 10% annual growth, ignoring inflation.  

Key Terms

Capital Gains Taxes:  Tax system that applies to some investment profits, such as qualified dividends and the sale of stock held for more than one year (“long-term gain”)

Corporate Bonds:  Bond issued by a corporation.  Profit produced by these bonds are usually taxed as income.

Federal Government Bonds:  Bond issued by the US government.  Commonly traded government bonds include treasury bonds (t-bonds) and treasury securities (treasuries”).  Profit produced by these bonds are usually taxed as income.

Long-Term Gain:  When someone sells a stock that they have held for more than one year, this is sometimes called a long-term gain.  The profit is taxed as capital gains. 

Municipal Bonds:  Bond issued by local and state governments. Profits generated by these bonds are usually not taxed by the federal government, which appeals to high income investors.

Ordinary Dividend:  Dividend earned on a stock that has been held for 60 days or less.  Ordinary dividends are taxed as ordinary income.

Qualified Dividend:  Dividend earned on a stock that has been held for more than 60 days.  Qualified dividends are taxed as capital gains.

Short-Term Gain:  When someone sells a stock that they have held for one year or less, this is sometimes called a short-term gain.  The profit is taxed as ordinary income. 

Taxable Event:  Industry term for any action that may trigger taxes is called a taxable event.  Earning a $4,000 bonus from your work is a taxable event.  Collecting dividends in a brokerage account is a taxable event.  Collecting dividends in a tax shelter is not a taxable event. 

Tax-Loss Harvesting:  A strategy of tax reduction where an investors choose to sell stocks (and other assets) that have lost value while retaining stocks that have gained value.  In doing so, the investor can count as much as $3,000 in stock losses against their taxable income. 

Practice Problems

***For the first 13 questions, assume all are taxed as individuals***

1. Devin earns $88,000 per year in income and is single. In February 2025, he buys $20,000 worth of stocks in a brokerage account. In March 2025, he sells these same shares for $25,000. He has no other earnings. How much federal taxes will he pay on these stock earnings?

His stock profit will be taxed as income.

Income from job:  $88,000

Income from stocks:  $5,000 (taxed in the $88,000 to $93,000 range, which is 22%)

Taxes on stock = $5,000(.22) = $1,100

2. Devin earns $88,000 per year in income and is single. In November 2024, he buys $20,000 worth of stocks in a taxable account. In March 2025, he sells these same shares for $25,000. He has no other earnings. How much federal taxes will he pay on these stock earnings?

His stock profit will be taxed as income, just like #1.

Income from job:  $88,000

Income from stocks:  $5,000 (taxed in the $88,000 to $93,000 range, which is 22%)

Taxes on stock = $5,000(.22) = $1,100

a.       When will he pay the taxes on this stock profit?

When he files his 2025 taxes, which are due by April 15 2026.

3. Devin earns $88,000 per year in income and is single. In February 2024, he buys $20,000 worth of stocks in a taxable account. In March 2025, he sells these same shares for $25,000. He has no other earnings. How much federal taxes will he pay on these stock earnings?

His stock profit will be taxed as capital gains.

Income from job:  $88,000

Capital Gains from stocks:  $5,000 (taxed in the $88,000 to $93,000 range, which is 15%)

Taxes on stock = $5,000(.15) = $750

a.       When will he pay the taxes on this stock profit?

When he files his 2025 taxes, which are due by April 15 2026.  Whether his investment profits are taxed as income or capital gains, he will still pay when he files.

4. Aleshia earns $38,000 as a veterinary assistant.  In a brokerage account, she earns dividends--$8,000 in dividends for a stock she bought 4 years ago.  How much federal taxes will she pay on these dividends?

She has $38,000 in income and $8,000 in capital gains.  Since her combined income and capital gains are less than $48,350, she is in the 0% capital gains tax bracket and will pay no taxes on her capital gains.

5. Amaya also earns $38,000 as a veterinary assistant.  In a brokerage account, she earns dividends--$8,000 in dividends for a stock she bought 4 years ago.   She also sells stock for a profit.  She paid $19,000 for the stock 3 months ago and sells it today for $29,000. How much federal taxes will she pay on his investment earnings?  Remember that Amaya will not pay these investment taxes till she files, so she needs to know how much she will owe so that she can be prepared to pay these taxes all at once!

Income from her job:  $38,000

Income from her stock sale:  $10,000 (taxed at the $38,000 to $48,000 range)

Income Taxes, stock sale = $10,000*12% = $1,200

Capital Gains:  $8,000 (taxed at the $48,000 to $56,000 range... note that the first $350 of capital gains is in the 0% tax bracket)

Capital Gains Taxes = $7,650*15% = $1,147.50

Total Investment Taxes = $2,347.50

6. Noah earns $44,000 as a construction worker.  In a brokerage account, he earns $9,000 in qualified dividends and $1,000 in ordinary dividends.  How much federal taxes will he pay on his investment earnings?

Income from his job:  $44,000

Income from ordinary dividend:  $1,000 (taxed in the $44,000 to $45,000 range)

Income Taxes, ordinary dividend = ($45,000-$44,000)(0.12) = $120

Capital Gains:  $9,000 (taxed at the $45,000 to $54,000 range, so he will “straddle” the 0% and 15% tax brackets.  The first $3,350 is applied at the 0% capital gains tax rate.  The remaining $5,650 is taxed at 15%.)

Capital Gains Taxes = ($5,650)(0.15) = $847.50

Total Investment Taxes = $120 + $847.50 = $967.50

7. I have an income of $100,000 every year and I’m single, with no additional earnings (other than those in this question). I invest $1,000 into stocks today. My stocks grow at 8.5% (with no dividends), compounded annually. In 10 years, I sell all of my stock. How much will I have to pay in taxes on these earnings, assuming tax policies do not change?

FV = $1,000(1.085)10 = $2,260.98

Capital Gains = $1,260.98

Capital Gains taxes (15% bracket) = $1,260.98(0.15) = $189.15

8. I own stocks that I purchased many years ago. I am an early-retiree and have zero income or other earnings. In 2025, I earn $25,000 in dividends. How much taxes will I pay on these dividends?

$0.  I am in the 0% capital gains tax bracket. 

9. I own stocks that I purchased many years ago. I am an early-retiree and have zero income or other earnings. In 2025, I earn $100,000 in dividends. How much taxes will I pay on these dividends?

Capital Gains Taxes = ($48,350 - $0)(0) + ($100,000 - $48,350)(0.15) = $7,747.50

10. Macy earns $61,000 from her job as a public school teacher.  In a brokerage account, she earns $2,000 in dividends from a stock she bought years ago.  She also sells stock—she paid $2,000 for the stock 9 months ago and sells it for $5,000 today.

a.       Solve for her total income taxes for 2025.

Income = $61,000 + $3,000 = $64,000

Income Taxes = $8,994

b.      Solve for her total capital gains taxes for 2025.

Capital Gains = $2,000

Capital Gains Taxes = $2,000(0.15) = $300

11. Alyssa earns $41,000 from her job as a private school teacher.  In a brokerage account, she earns $1,000 in ordinary dividends and $4,000 in qualified dividends.  She also sells stock—she paid $2,000 for the stock 9 months ago and sells it for $5,000 today.

a.       Solve for her total income taxes for 2025.

Income = $41,000 + $1,000 + $3,000

Income = $45,000

Income Taxes = $5,161.50

b.      Solve for her total capital gains taxes for 2025.

Capital Gains = $4,000 (taxed in the $45,000 to $49,000 range… the first $3,350 is taxed at 0%, the remaining $650 is taxed at 15%)

Capital Gains Taxes = ($650)(0.15) = $97.50

12. I earn a dividend from a stock I bought exactly 60 days ago.  Is this dividend taxed as income or capital gains?

Income.  You must hold a stock more than 60 days to be taxed as capital gains.

13. I sell stock (for a profit) that I bought exactly one year ago.  Is this profit taxed as income or capital gains?

Income.  You must hold a stock more than one year to be taxed as capital gains.

14. Amy has an income of $64,000 from her job as a dental hygienist.  In a brokerage account, she earns $500 in ordinary dividends.  In the same account, she sells stock for $50,000.  She bought these shares for $22,000 8 months ago.  Solve for her total federal income taxes, capital gains taxes, Social Security taxes, and Medicare taxes.

Income = $64,000 + $500 + $28,000 = $92,500

Income Taxes = $15,264

Capital Gains = $0

Capital Gains Taxes = $0

Social Security Taxes = $64,000(0.062) = $3,968

Medicare Taxes = $64,000(0.0145) = $928

15. Evelyn has an income of $24,000 from her job as a dental hygienist.  In a brokerage account, she earns $500 in qualified dividends.  In the same account, she sells stock for $33,000.  She bought these shares for $22,000 13 months ago.  Solve for her total federal income taxes, capital gains taxes, Social Security taxes, and Medicare taxes.

Income = $24,000

Income Taxes = $2,641.50

Capital Gains = $500 + $11,000 = $11,500

Capital Gains Taxes = $0 (since income and capital gains combined do not exceed the 0% bracket)

Social Security Taxes = $24,000(0.062) = $1,488

Medicare Taxes = $24,000(0.0145) = $348

***Married, filing jointly examples***

16. A married couple earns $183,000 at their jobs.  In a brokerage account, they sell stock that they bought 90 days ago; they paid $61,000 for the stock and sell it for $88,000.  They also earn $16,000 in qualified dividends. 

a.       Solve for their total income taxes for 2025.

Income = $183,000 + $27,000 = $210,000

Income Taxes = $36,094

b.      Solve for their total capital gains taxes for 2025.

Capital Gains = $16,000 (taxed in the $210,000 to $226,000 range)

Capital Gains Taxes = $16,000(0.15) = $2,400

17. A married couple earns $81,000 at their jobs.  In a brokerage account, they sell stock that they bought four years ago; they paid $1,000 for the stock and sell it for $6,000.  They also earn $2,000 in ordinary dividends and $5,000 in qualified dividends.  How much money do they need to be prepared to spend on investment taxes when they file?

Based on the way the question is asked, we only need to solve for their investment taxes.

Income from Job = $81,000

Investment Income = $2,000 (taxed in the $81,000 to $83,000 range)

Investment Income Taxes = $2,000(0.12) = $240

Capital Gains = $5,000 + $5,000 = $10,000 (taxed in the $83,000 to $93,000 range, which is the 0% bracket)

Capital Gains taxes = $0

Total Investment Taxes = $240