Do You Pay Taxes on Investments? What You Need to Know

If you’ve made money from stocks, real estate, or other investments, you might be wondering: Do you have to pay taxes on those profits? The answer depends on what kind of income you earned — and how long you held the investment. Understanding how investment income is taxed helps you make smarter financial decisions, minimize surprises at tax time, and find opportunities to lower your tax bill.

This guide walks through how the IRS taxes investment income, what rates apply, and proven strategies to keep more of your gains.

Key Highlights

• Most investment profits are taxable, including capital gains, dividends, and interest income.

• Short-term vs. long-term capital gains: Short-term gains are taxed like regular income, while long-term gains often qualify for lower rates.

• The 3.8% net investment income tax (NIIT) may apply to high-income earners.

• Some states charge their own capital gains taxes, like Washington.

• Using tax-advantaged accounts and timing your sales can help minimize what you owe.

• 1-800Accountant’s expert CPAs, EAs, and tax professionals can help you plan, file, and optimize your investment tax strategy year-round.

Types of Investment Income That May Be Taxed

Capital Gains (Realized Gains)

A capital gain occurs when you sell an investment for more than you paid for it. The taxable amount is the difference between your sale price and your “cost basis,” which includes purchase price and related expenses.

• Short-term gains (assets held for one year or less) are taxed as ordinary income.

• Long-term gains (held more than a year) enjoy preferential tax rates, often 0%, 15%, or 20%.

Your broker reports capital transactions on IRS Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, showing the cost basis and proceeds. Be aware of the wash-sale rule, which prevents claiming a loss if you repurchase the same or substantially identical investment within 30 days.

Dividends & Interest Income

Dividends are payments from corporations or funds to shareholders.

• Qualified dividends are taxed at the same lower rates as long-term capital gains.

• Non-qualified dividends and interest income from bonds, CDs, and savings accounts are taxed as ordinary income.

Investors also encounter income from REITs, master limited partnerships (MLPs), and other pass-through entities, which may have unique tax treatments.

Other Investment Income Sources

Other types of taxable investment income include:

• Rental property income and gains from property sales.

• Royalties from intellectual property.

• Collectibles and certain small business stock gains, which may be taxed at special rates.

How Much Tax Do You Pay on Investment Income?

Short-Term Capital Gains = Ordinary Income Rates

Short-term gains are added to your regular income and taxed according to your federal bracket, ranging from 10% to 37% for 2026.

Long-Term Capital Gains Rates

For 2025, long-term capital gains rates remain 0%, 15%, or 20%, depending on your taxable income. Many taxpayers pay 0% or 15% on long-term gains.

Special rules apply for certain asset types:

• Collectibles: up to 28% tax rate.

• Depreciation recapture on real estate: up to 25%.

NIIT

NIIT adds 3.8% for taxpayers with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly). It applies to:

• Interest

• Dividends

• Capital gains

• Rental income

• Other passive income

State and Local Taxes on Investment Income

Many states tax investment gains as ordinary income. A few have special rules — for example, the Washington capital gains tax imposes 7% on certain long-term gains above $278,000. Some states, such as Florida and Texas, have no income tax at all.

When You Don’t Pay Tax (or Pay Less)

Losses, Offsets, and Tax-Loss Harvesting

If your investments lose value, those losses can offset your gains.

• Net losses up to $3,000 can be deducted from ordinary income each year.

• Excess losses can be carried forward indefinitely. Many investors use tax-loss harvesting, strategically selling losing assets to balance profitable ones.

Tax-Advantaged Accounts

Investments held in IRAs, 401(k)s, or Roth accounts grow tax-deferred or tax-free. Only taxable brokerage accounts generally trigger annual investment taxes. For small business owners, SEP and Solo 401(k)s offer similar advantages.

Lower Bracket or 0% Rate Situations

If your taxable income falls below certain thresholds, your long-term capital gains rate may be 0%. Proper timing — such as deferring other income or maximizing deductions — can help you stay in a lower bracket.

Strategies to Minimize Investment Taxes

Holding Period Strategy

Waiting until you’ve held an asset for more than one year can reduce your tax rate significantly. Planning sales near year-end allows you to manage which tax year gains fall into.

Tax-Loss Harvesting & Strategic Sales

Match gains and losses each year, and use “specific identification” to select which shares to sell. Remember the wash-sale rule when repurchasing positions.

Asset Location & Account Placement

Place highly taxed or high-turnover investments, like actively managed funds, inside tax-deferred accounts, while keeping tax-efficient assets (like ETFs or municipal bonds) in taxable accounts. Municipal bond interest is often federally tax-exempt.

Gifting, Donor-Advised Funds, and Charitable Strategies

Donating appreciated investments to qualified charities can help you avoid capital gains while earning a charitable deduction. Gifting stock to family members in lower tax brackets can also reduce overall tax exposure.

Considerations for High-Income Taxpayers

High earners may face additional layers, such as:

• NIIT

• Phase-outs

• The alternative minimum tax

"Bunching," which involves strategic timing, charitable giving, and professional tax planning, can make a big difference.

How to Report and File Investment Income

Forms & Schedules to Know

• Schedule D (Form 1040), Capital Gains and Losses, and IRS Form 8949, Sales and other Dispositions of Capital Assets: report sales of stocks and other capital assets.

• Form 1099-B, IRS Form 1099-DIV, Dividends and Distributions, and IRS Form 1099-INT, Interest Income: issued by brokers and banks.

• Schedule B (Form 1040), Interest and Ordinary Dividends: report interest and ordinary dividends.

Estimated Tax Payments & Withholding

If you earn significant investment income, you may need to make quarterly estimated payments. Safe harbor rules protect against penalties if you pay 100% of your prior year’s tax (or 110% for high earners).

Use 1-800Accountant’s self-employment tax calculator to help estimate quarterly payments accurately.

Common Mistakes & Audit Risks

Avoid these common mistakes and audit risks to ensure compliance and smooth operations: 

• Forgetting to report small dividends or interest.

• Using the wrong cost basis on sales.

• Violating the wash-sale rule.

• Missing estimated tax deadlines.

Example Scenarios / Case Studies

In another example, placing high-yield bonds inside an IRA shields the interest from immediate taxation — demonstrating how asset placement can save money over time.

When to Talk to a Tax Professional (or 1-800Accountant)

Investment tax rules are complex — and mistakes can be costly. If you have substantial gains, multiple income sources, or hold assets in different states, professional guidance can ensure accuracy and uncover savings opportunities.

At 1-800Accountant, America's leading virtual accounting firm, our CPAs, EAs, and tax professionals help clients with proactive income tax preparation, capital gains planning, and year-round advisory support. Whether you’re an investor, freelancer, or business owner, we’ll help you create a customized plan to minimize your taxes and maximize your returns.

Ready to simplify your investment taxes? Schedule your free consultation today with a 1-800Accountant small business expert.

Summary & Key Takeaways

As you can tell from this article, while many investment profits are taxed, rates depend on the type, holding period, and income, among other factors. This illustrates why planning matters and expert support makes a difference.

Schedule your free 30-minute consultation to get started.