Tax Help - Reporting Your Investments

Reporting Your Investments

If you sold stocks, bonds, or mutual funds, then you need calculate your capital gains or losses when you file your Form 1040.

Investors need to have a firm grasp on how investments are taxed. Especially crucial is knowing the holding periods for short-term and long-term investments. The holding periods determine what tax rate will apply to your investments. Also important is figuring out your cost basis, which is the amount you invested in a security. Keeping excellent records and using a spreadsheet to keep track of your stock trades are vital for figuring out your holding period and cost basis.

One problem I see all the time is incomplete recordkeeping. The IRS requires taxpayers to be organized and keep good records of investments. Most crucial is having a record of your cost in various investments. Sometimes brokerage reports can help, but sometimes you'll need to dig this information up yourself. That's why I encourage investors to keep a copy of all their trade confirmations with their permanent tax files. Not only will good records help you monitor how your investments are performing, it will also make tax preparation infinitely easier.

Finally, don't pass up an opportunity to add to your investment portfolio. Invest your tax refund into a mutual fund or other long-term investment. I typically recommend my clients to split their tax refund into three equal portions: invest or save one-third, pay off debt with another third, and use the final third to reward yourself. The IRS has made this strategy of mine a little bit easier to accomplish. You can now split your refund and direct deposit it into two or three bank accounts. You can even use this feature to deposit some or all of your refund into an Individual Retirement Account.