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Tax documents

Lesson in Course: Investing basics (advanced, 3min )

Investment income is taxable income. What should we expect at the end of every year?

Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes. - Benjamin Franklin

 

The worst feeling is being surprised by tax documents in the mail after filing our taxes. Let's review what we should expect to receive before April.  

What is taxable?

Capital gains

Any money we make on our investments is taxed. We realize our gains when we sell our assets, and by locking in a profit, we create a taxable event. If we don't sell, the paper gains stay unrealized and non-taxable.

Tap here for an example

We bought shares of AAPL at $90 per share. The current share price is $125, so we have unrealized gains of $35 per share. If we decide to sell, we would realize the profit of $35 per share and pay tax on that amount. 

Based on how long we've held the shares, tax rates on the capital gains will differ. Read more in our lesson about capital gains taxes.

Income 

Outside of buying and selling shares, we can also earn income from our investments. These direct cash payments are taxed and can come from dividends, interests, and partnership distributions.

Tax Documents

Our brokerage prepares a 1099 form for each taxable year. The 1099 forms come in different flavors, and we may receive multiple. Below are the various forms explained and in order from most common to least common.

1099-B

The most common form is the 1099-B, which lists out all of our transactions, including our total short-term and long-term capital gains and losses for the year. The transactions covered are sales transactions, short transactions, closing options transactions, redemptions, tender offers, and mergers for cash.

1099-DIV

The 1099-Div totals the dividends or cash payments we receive for being shareholders. Dividends are a great way to build an income, and as long as we received $10 or more, we should expect this form.

1099-INT

If we invest in any interest-generating assets, such as bonds or money markets, we will receive a 1099-INT if the interest collected totals $10 or more. The interest payments from investing in loans and bonds are different from a company's dividends.

1099-MISC

The miscellaneous income form serves as a catch-all for any other income. Examples include interest from stock yield enhancement programs or dividends received when shares are out on loan. We generally shouldn't expect a 1099-MISC if we are keeping things simple.

1099-OID

Original issue discounts on corporate bonds, certificates of deposit (CDs), collateralized debt obligations (CDOs), and U.S. government obligations of $10 or more make up the rarest 1099 form. We receive a 1099-OID when we buy zero-coupon bonds or other types of debt that delay interest payment until maturity. For 99% of us, we will never see this form.

K-1

A K-1 is a partnership statement. Certain real-estate investment trusts (REIT) or private equity funds function as partnerships. By investing, we become limited partners and earn income, reported by K-1s, from the operations. Be mindful when selecting K-1 generating investments—they complicate taxes and are generally only worth it if we have an accountant who prepares our taxes.

At Archimedes, our goal is to make investment literacy accessible and free for everyone.

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