by Beth Pinsker
The taxes you pay on dividends, interest, and capital gains could be weighing on your overall investment performance.
After last year's disruptive tax season filled with temporary Covid-19 rule changes and other complications, the 2022 tax season is almost sleepy by comparison, especially for investors.
"Activity is minimal: just a small amount of dividends and very few transactions. Last year, everyone decided they wanted to be a trader, but this year, people didn't get as involved in the market and there are no tax law changes with investment as a whole," says Tynisa Gaines, who runs her own Texas-based tax preparation firm and is a registered agent, a special certification granted by the IRS.
However, the IRS wants to know details about even the smallest amounts. If you've made money by investing, you need to get a 1099 from the financial institution that owns it, which even applies to cryptocurrency and amounts that seem too small to merit a tax form. "But it's very possible that you won't get them," says Gaines.
You should look for any combination of these:
If you are missing something, you will have to go back to the sender and ask them to resend it to you. If you have signed up to receive electronic-only communications, you may need to go to your portal and download the forms yourself. This may be easier in some places than others. If you had interest on a Series I bond redemption, for example, you'd have to dig into the shaky TreasuryDirect.gov website to get the proper forms.
If all these efforts fail and you simply cannot get the forms, you still have a duty to report income. "If all you can find is the entire year's history of your statement, that still needs to be reported, regardless of the amount," Gaines says.
look for red flags
Once you have the forms, you can complete the Schedule D section of your tax return and add the income to your 1040. But the process can give you much more information 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 brake."
Here's what to look for on your investment tax forms to assess how you're doing.
Lots of interest income. You might have too much cash. "If you see big interest payments for cash because rates have gone up, maybe that's a good thing, but maybe they have a lot of money that could be invested elsewhere," Gaines says.
big dividends
High dividends means that you invest in dividend-paying stocks, they are making money even if the market is down, but that's when you should be looking for some losses to offset the tax burden on those gains. The problem for his 2022 return is that he had to have caught them before December 31.
โI am one of those who actually sold crypto on 12/31 after doing some analysis,โ says Gaines. "I knew I would sell at a loss, so I sold it to offset my other income."
so many gains
If you have big gains, you may think you are good at investing, but it could be that you are 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 jump into investing. We saw a lot of trades and a lot of net losses. It was in the millions of dollars, and the network was negative: all this activity for nothing."
If you really have a large amount of winnings, you may end up owing money when you file your taxes. If you know this is coming, you can always have additional withholding from your W-4, which is the best way to go because your income is smoothed along with regular payments. You could also make estimated payments, Gaines says, which you want to make sure you do so you don't get penalized at the end of the process.
carryover losses
If you have more losses than gains, you can roll over the remaining amount and use up to $3,000 per year on future tax returns. "It could mean you had a bad year," Gaines says, or it could mean you took a precautionary measure against future income. Either way, it's important for investors to realize that losses are part of the process and should incorporate that into their investment philosophy.
โPeople think they will be millionaires. Or they start thinking, 'I can trade on the day, and I'll take the losses, or I'll make some quick money and withdraw it.' You'll get burned either way," says Gaines. "Investing is about buying and holding for the long term, not making money today."
cryptographic problems
Did you check the box that said you had some type of qualifying cryptocurrency transaction in 2022? So you need to take a close look at what exactly you did. โThe record-keeping part is not fun,โ says Gaines, who is also a tax manager at TokenTax, a crypto tax accounting firm.
The biggest problem you are 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 lost tokens," says Gaines.
The answer for now is no.
โThey can't cancel them because the bankruptcy hasn't been resolved yet,โ says Gaines. "You might get some of that money back over time, but no, now there's no write-off unless you sell your shares, and then it's just a regular profit or loss."
If you have any questions about the mechanics of investing, how it fits into your overall financial plan, or what strategies can help you make the most of your money, you can also write to beth.pinsker@marketwatch.com for help.
-Beth Pinsker
(END) Dow Jones Newswires
02-25-23 0731ET
Copyright (c) 2023 Dow Jones & Company, Inc.
