April 13, 2024
Your tax return can tell you a lot about how to manage your investments

Your tax return can tell you a lot about how to manage your investments

After last year’s disruptive tax season full of temporary Covid-19 rule changes and other complications, the 2022 filing season is almost sleepy in comparison, especially for investors. 

“Activity is minimal – just a small amount of dividends and very few trades. Last year, everyone decided they wanted to be traders, but this year, people didn’t engage in the market as much and there are no tax law changes regarding investment as a whole,” says Tynisa Gaines, who has her own tax preparation firm based in Texas and is an enrolled agent, a special certification given by the IRS. 

MarketWatch financial-planning columnist Beth Pinsker talks to tax preparer Tynisa Gaines about how to manage the gains and losses from your investments — including crypto — on your tax return this filing season.

Nevertheless, the IRS wants to know the details about even the smallest amounts. If you’ve earned any money from investing, you should get a 1099 from the financial institution holding it – that even goes for crypto and for amounts that seem too small to merit a tax form. “But it’s very possible you don’t get them,” says Gaines. 

You should be looking for any combination of these: 

  • 1099-B which reports capital gains and losses
  • 1099-DIV for dividend income and capital gain distributions
  • 1099-INT for interest income
  • 1099-R for retirement income distributions

If you’re missing anything, you’ll have to go back to the issuer and ask for it to be resent. If you’ve signed up for electronic-only communications, you might have to go to your portal and download the forms yourself. This can be easier at some places rather than others. If you had interest from the redemption of a Series I bond, for instance, you’d have to delve into the wonky TreasuryDirect.gov website for the proper forms. 

If all these efforts fail and you just can’t get the forms, you still have a duty to report the income. “If all you can come up with is the history all year from your account statement, that should still be reported, regardless of the amount,” says Gaines. 

Look for red flags

Once you have the forms, you’ll be able to fill out the Schedule D section of your tax return and add the income into your 1040. But the process can offer you a lot more insight than just your current tax liability. What you want to look for is the overall tax-efficiency of your investments – which professionals refer to as your “tax drag.” 

Here’s what you should be looking for on your investment tax forms to assess how you’re doing. 

A lot of interest income
You could be holding too much in cash. “If you see large interest payouts for cash because rates have come up, maybe that’s a good thing, but maybe they have a lot of money sitting around that could be invested in something else,” says Gaines.

Big dividends

High dividends means you invest in dividend-paying stocks, they’re making money even if the market is down, but that’s when you should be looking for some losses to offset the tax burden of those gains. The catch for your 2022 return is that you had to have captured them by Dec. 31. 

“I’m one of those that actually sold crypto on 12/31 after I did an analysis,” says Gaines. “I knew I’d be selling for a loss, so I sold it to offset my other income.”

So many gains

If you have large gains, you might think you’re good at investing, but it could be that you’re selling too much and not taking enough losses. “Sometimes people have that ‘aha’ moment,” says Gaines. “It’s funny, because after Covid, we saw a lot of people jumping into investing. We saw a lot of transactions and a lot of net losses. It amounted to millions of dollars, and the net was negative – all this activity for nothing.” 

If you have a truly large amount of gains, you might end up owing money when you file your taxes. If you know this is coming, you can always have additional withheld from your W-4, which is the best way to go because then your income is smoothed out along with the way with regular payments. You could also make estimated payments, Gaines says, which you want to make sure to do so you’re not assessed penalties at the end of the process. 

Carry-over losses

If you have more losses than you have gains, you can carry over the remaining amount and use up $3,000 of it per year on future tax returns. “It could mean you had a bad year,” says Gaines, or it could mean you took a pre-emptive action against future income. Either way, it’s important for investors to realize that losses are part of the process and you have to incorporate that into your investing philosophy. 

“People think they will be millionaires. Or they get in thinking ‘I can day trade, and either I’ll take the losses or make some quick money and cash out.’ You’ll get burned out either way,” says Gaines. “Investing is about long-term, buy and hold, not making money off it current day.”

Crypto issues

Did you check the box that said you had any sort of qualifying cryptocurrency transaction in 2022? Then you need to look closely at what exactly you did. “The record-keeping part is not fun,” says Gaines, who is also tax manager at TokenTax, a crypto-tax accounting firm. 

The biggest issue she’s seeing in 2022 is that many people have funds tied up in failed crypto exchanges. “People are still trying to figure out if they can write off the lost tokens,” says Gaines. 

The answer for now is no. 

“They can’t write them off because bankruptcy has not been resolved yet,” says Gaines. “It might be that you get some of that money back eventually, but no there’s no write-off now unless you sold your holdings, and then it’s just regular gain or loss.”

If you have a question about the mechanics of investing, how it fits into your overall financial plan or what strategies can help you make the most out of your money, you can also write for help at [email protected]

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