The answer is probably pretty universal, but I'm in the United States. If I have a broker investing money on my behalf or if I invest my money myself in stocks or mutual funds (what's the general term for these sorts of things?) via, say, Charles Schwab, how do my taxes get paid? Does the brokerage automatically send Uncle Sam his cut or do I have to send the IRS a check?

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  • Step 1: see IRS publication 550 (also available in PDF, currently 76 'letter' pages). Step 2: get an accountant, or tax software like TurboTax etc to mostly handle this for you. – dave_thompson_085 yesterday

In the US, capital gains taxes aren't levied on individual transactions - they're aggregated for the entire calendar year. Normally taxes aren't withheld from brokerage activity unless you are doing something like withdrawing funds from an IRA, where the withdrawal is taxed like normal income. One reason for not withholding at the transaction level is that capital gains can be offset by losses, and since the brokerage won't credit you tax for losses, it would usually lead to too much over-withholding. Plus many investors will have thousands of transaction, which would be an additional burden on the brokerages to withhold properly.

When you file your taxes after the year is over, all of your capital gains and losses are netted (based on short- or long-term gains) and added to your overall tax liability. Depending on how much tax you owe and how much was withheld from other sources (e.g. your salary) you will either have to pay additional tax or get a refund.

If you only have income from trading securities you probably will want to pay estimated taxes quarterly. That way you can avoid any underpayment penalties. You'll probably also want to hire a CPA to do that for you :)

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  • How would I inadvertently underpay? From my understanding, I just pay what I owe by the end of the tax year and that's that, no? – PiKindOfGuy 2 days ago
  • Do I get a document from the brokerage telling me how much I owe in taxes? – PiKindOfGuy 2 days ago
  • "How would I inadvertently underpay?" There are IRS rules regarding ho much tax you have to pay (or have withheld) throughout the year. If you don't pay enough during the year you could owe a penalty. And they won;t tell you how much tax you owe because taxes are levied holistically and they don't know how much other income you have to know what tax bracket you're in. All they'll tell you is how much income might be subject to taxes. – D Stanley 2 days ago
  • @PiKindOfGuy+ And even the broker's report of your income isn't always exactly right: e.g. they might show a loss as usable but it's actually a wash sale because you bought elsewhere, they might show a dividend as qualified but you actually shorted or hedged elsewhere, etc. Though they are much closer since 2012-ish when mandatory basis reporting started. Also: gains are taxed for the year realized (e.g. stock is sold), but dividends and interest are taxed for the year received, and bond discount (OID) is imputed to years before you receive it. – dave_thompson_085 yesterday
  • @PiKindOfGuy you get a form from the brokerage that tells you what figures to enter into your tax software to calculate the amount you owe (or you give it to your accountant and they calculate what you owe). If you do your taxes yourself, the software will ask you to enter the figures from Box 1, Box 2, etc. from the form, and it will use that together with all your other income and deductions to come up with a final amount that you owe. – Nobody 8 hours ago

You don't pay taxes when you or your broker invests money on your behalf. Taxes are due when you sell investments and there are capital gains. You are responsible for making the appropriate tax payments to the IRS.

In the U.S. investors receive the full amount of dividends received from American companies. However, many foreign governments withhold taxes on dividends from companies in their jurisdiction.

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  • Do I get a document from the brokerage telling me how much I owe in taxes? – PiKindOfGuy 2 days ago
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    The brokerage firm will provide tax documents detailing tax information (dividends, interest, margin interest borrow fees, capital gains, foreign taxes paid, etc. They have no idea what your income is or what your tax bracket is so they have no clue how much you owe in taxes. That is your responsibility to figure out (or your accountant's). – Bob Baerker 2 days ago

You will have to declare the taxes on your yearly or quarterly filing (depending on how you file and when the brokerage gives you statements). You are then responsible for making up the difference, if any, in taxes owed to the IRS via check or other e-pay options.

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