So You Have a Taxable Brokerage Account. When Will You Actually Owe Taxes?

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If you have a taxable brokerage account, you’ll be taxed when your investments make a profit. But that doesn’t mean you have to pay taxes every year. Find out more. 

There are different kinds of brokerage accounts you can invest in. You could open a taxable brokerage account, or you could open a tax-advantaged brokerage account, such as a traditional IRA or a Roth IRA.

If you have a tax-advantaged account, you can either take a deduction for the amount of money you contribute to the account in the year you invest (in the case of a traditional IRA) or you can withdraw money tax-free (in the case of a Roth IRA). You also will not pay taxes as your money in the account grows.

If you have a taxable account, though, the rules work differently. Not only do you not get any tax savings either when you contribute to the account or when you make withdrawals, but you also have to pay taxes in certain circumstances as your account balance grows.

So, when exactly do you have to pay taxes on the money in your brokerage account? Here’s what you need to know.

This is when you’re taxed on the money in your brokerage account

When you have a taxable brokerage account, you will have to pay taxes if you make a profit on your investments when you sell them.

Say, for example, you buy $1,000 worth of a particular stock and the value of your shares goes up and your investment is now worth $2,000.

If you don’t sell and pocket the $1,000, you will not owe taxes on that $1,000 gain. If the stock’s value goes back down before you sell and you only end up with $1,200 worth of shares at the time when you unload your shares, you’d be taxed only on the $200 in gains you actually made when you sold the asset.

The gains you make “on paper” don’t count and aren’t taxed, since you don’t actually have that money yet — and you potentially may never get it, as the financial markets fluctuate.

Here’s how much tax you’ll have to pay

The amount of tax you have to pay when you sell your investments at a profit will be based on how long you held the stock.

If you held the stock you made a profit on for a year or less, you will be taxed at your ordinary income tax rate. Your gains are just treated as regular income.

But if you own the asset for longer than a year, you’ll be taxed at the more favorable long-term capital gains tax rate. The table below shows what your long-term capital gains tax rate would be.

You are also allowed to deduct losses to offset your gains. So, for example, if you made a profit of $1,000 on one stock but lost $200 on another, you would typically pay capital gains taxes only on $800 in profits.

The rules can be a little confusing as to exactly what losses can be deducted from and what expenses you can deduct. And aside from capital gains taxes, you may owe taxes on dividends and interest received in your taxable brokerage account. However, most tax-filing programs can help you figure out exactly what your tax liability will be — or an accountant can help too.

The bottom line, though, is that you won’t have to worry about paying taxes on profits when your investments perform well in your brokerage account — until you sell them. And your taxes will be a lot lower if you hold your investments for more than a year.

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