Investments Taxes

Q&A: How is a brokerage (taxable investment) account taxed?

TLDR: The gains (or profit) of the holdings are subject to tax, but the rate at which they are taxed depends on the owner’s tax filing status, income, and whether they held it for more than a year.

The amount someone spends on a particular investment in a brokerage account is called the “cost basis“. If the investment increases in value and hasn’t yet been sold, that is called an “unrealized gain”. If the investment decreases in value and hasn’t yet been sold, that is called an “unrealized loss”. A gain or loss becomes “realized” when the investment is sold. If someone sells an investment at a gain in a brokerage account, the tax rate for that holding depends on 2 factors: how long the investment was held (short-term: 1 year or less, or long-term: over 1 year) and the tax bracket of the individual.

Real-life Application: On August 31st of 2019, Person A bought 100 shares of XYZ stock at $100 per share. On August 31st of 2020, XYZ stock was at $150 per share and Person A, unaware they only had to wait 1 more day to sell it in order to achieve the more favorable long-term capital gains rate, sold all 100 shares of the stock for a $5,000 gain (($150-$100)*100). When it came time to do their 2020 taxes, their filing status was single and they had other income of $45,000. After adding their capital gains to their income, and taking their standard deduction of $12,400, Person A has a taxable income of $37,600 which puts them in the 12% tax bracket. Effectively, if they would have waited just 1 day to sell their XYZ stock, they would have saved $600 in federal tax ($5,000*12%) because they would have held the stock for a year and a day, which qualifies them for their long-term capital gains rate of 0%.

Short-term or long-term?

How long it was held1 year or lessOver 1 year
Taxed asShort-term capital gain (or simply, income)

*See 2020 Federal Tax Brackets
Long-term capital gain

*See 2020 Long-Term Capital Gains Rates

2020 Federal Tax Brackets

Tax rateSingleMarried Filing Jointly (MFJ)Married Filing Separately (MFS)Head of Household (HOH)
10%$0 to $9,875$0 to $19,750$0 to $9,875$0 to $14,100
12%$9,876 to $40,125$19,751 to $80,250$9,876 to $40,125$14,101 to $53,700
22%$40,126 to $85,525$80,251 to $171,050$40,126 to $85,525$53,701 to $85,500
24%$85,526 to $163,300$171,051 to $326,600$85,526 to $163,300$85,501 to $163,300
32%$163,301 to $207,350$326,601 to $414,700$163,301 to $207,350$163,301 to $207,350
35%$207,351 to $518,400$414,701 to $622,050$207,351 to $311,025$207,351 to $518,400
37%over $518,400over $622,050over $311,025over $518,400

2020 Long-Term Capital Gains Rates

Tax rateSingleMarried Filing Jointly (MFJ)Married Filing Separately (MFS)Head of Household (HOH)
0%$0 to $40,000$0 to $80,000$0 to $40,000$0 to $53,600
15%$40,001 to $441,450$80,001 to $496,600$40,001 to $248,300$53,601 to $469,050
20%over $441,450over $496,600over $248,300over $469,050

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