The IRS has different tax forms for every type of income imaginable. With investing, that can quickly get complicated and lead to mistakes. At the very least, you should have a basic idea of what the tax forms do and which forms to expect each year. That alone will give you a better picture of your tax costs, allowing you to build a more tax efficient portfolio.
Investment income comes in three forms: earned interest, dividends, and capital gains. Each is taxed differently. Earned interest is regular income subject to federal income tax while dividends and capital gains has its own tax rates.
You’ll get separate tax forms for each income type. But there’s a good chance you’ll get multiple forms for each investment too. For instance, TD Ameritrade sends me a consolidated 1099 every year for the stocks and ETFs I own, which is just a 1099-INT, 1099-DIV, and 1099-B rolled into one big statement. Below are the more common tax forms you’ll receive for investment income.
- What is It?: A 1099-B reports the sale of an investment to the IRS. Your 1099-B has all the cost basis information: buy and sell price, dates, and type of capital gain or loss.
- Income Type: Capital Gains
- Investment: Stocks, Bonds, ETFs, and Mutual Funds
This can come as one 1099-B per sale, but typically most brokers and fund companies now send a consolidated 1099 tax form with every sale included. The information on form 1099-B is then used to fill out your Schedule D. Learn more about form 1099-B.
This guide on cost basis covers everything you need to know about cost basis reporting and tax savings.
- What is It?: 1099-DIV reports any dividends and distributions paid to you during the tax year. This includes reinvested dividends (DRIPs), qualified dividends, nondividend distributions, mutual fund’s capital gain distributions, and withheld taxes.
- Income Type: Dividend Income or Capital Gains
- Investment: Dividend Stocks, Preferred Stocks, REITS, Collectibles, Mutual Funds, and ETFs
Form 1099-DIV can be tricky. Not all the reported income is taxed as dividends. For instance, a fund’s capital gain distribution is taxed as a long-term capital gain. Yet, a nondividend distribution is a return of capital (it offsets your initial cost basis) which you won’t pay taxes on until you sell the investment. Here’s a break down of form 1099-DIV.
- What is It?: 1099-INT reports interest earned from investments for the tax year.
- Income Type: Interest Income
- Investment: Savings Account, Money Market Accounts, CDs, Bonds, and Bond Funds
Banks, brokerages, and fund companies must send a 1099-INT if you earned at least $10 in interest. If your earned interest exceeds a certain amount you are required to fill out a Schedule B. Find out more about form 1099-INT.
- What is It?: A Schedule B is used to file earned interest and dividends when the total amount is over $1,500. This is attached to your 1040 when you file your return.
- Income Type: Interest and Dividend Income
- Investment: Savings Accounts, Money Market Accounts, CDs, Bonds, Dividend Stocks, Preferred Stocks, REITs, Mutual Funds, and ETFs
- What is It?: A Schedule D is used to file the short and long-term capital gain or loss of all your investments for the year. This is attached to your 1040 when you file your return.
- Income Type: Capital Gains
- Investment: Stocks, Bonds, Mutual Funds, and ETFs
The Schedule D is used along with Form 8949 for filing capital gains and losses from the sale of your investments. You’ll also use it for reporting gains or losses from other assets like collectibles or rental property. In filling out the Schedule D, you’ll be able to use capital losses to offset gains and lower your taxes.
- What is It?: a Schedule K-1 reports income, depreciation, or losses from a partnerships, S Corp., or trust that is passed on to you, the unitholder.
- Income Type: Earned Income or Capital Gains
- Investment: MLPs (Master Limited Partnerships) and some ETFs
K-1 forms are like riding a bike, at first glance it looks very difficult, but gets easier the more you use it. That said, do some research first before investing. MLPs or other partnerships offer some nice tax benefits under the right situation, but can be costly when used wrong.