US Stocks and Tax Filing

A lot of people invest in US stocks, and once you have investments and income, taxes are hard to avoid. These days, many tax software programs let you import tax forms and file automatically, but it is still very helpful to understand the basic concepts and logic behind how stock investing is taxed. Once you understand the rules, you may be able to reduce the tax you owe on investment income to some extent, and if you have losses, you can also use them more effectively to offset taxes.

This article provides a simple introduction to tax issues related to US stocks, with the goal of keeping things easy to understand. Let’s start with a table to give an overall picture:

Status Condition Capital gains tax Dividend tax Tax form required
US resident Citizen, green card holder, or meets the SPT Long-term gains: 0%, 15%, 20% Qualified dividends: 0%, 15%, 20% Schedule D
Short-term gains: taxed together with ordinary income Nonqualified dividends: taxed together with ordinary income
Nonresident Students / visiting scholars / employees, etc. staying for 183 days 30% 10% Schedule NEC
Living abroad 0% 10% No tax filing required

Tax Residency Status

When talking about taxes, the first thing to consider is your tax filing status. People with different statuses are taxed very differently on gains or losses from US stock investing. The first question is whether you are considered a US tax resident:

  • US tax resident: US citizens, green card holders, and people who meet the Substantial Presence Test (SPT)
  • To emphasize: if you are a US citizen or a US green card holder, your US stock investment income is still taxed as that of a US resident even if you do not live in the US.

The Substantial Presence Test means:

  • You were physically present in the US for at least 31 days during the current tax year (counted by calendar day; even if you were in the US for less than 24 hours on a given day, it still counts as one day; the same applies below); and
  • The total of your days in the US in the current tax year + 1/3 of your days in the previous year + 1/6 of your days in the year before that is at least 183 days

There are some exceptions to the Substantial Presence Test. For example, students and accompanying family members on F, J, M, or Q visas are generally still treated as nonresidents for their first five years even if they meet the SPT. There are also some dual-status and married filing jointly situations that we will not go into here. For details, please see our analysis of US tax residency:

One thing to note is that the tax year you are filing for must match your tax status for that year. For example, if you were not a resident in 2020 (did not meet the SPT) but did meet the SPT in 2021, then you would file 2020 taxes as a nonresident and 2021 taxes as a US resident. The rest of this article will also be divided into those two categories, so you can read the section that applies to you.

US Residents

For most US residents, the main tax items to consider are the following:

  • Capital gains: divided into long-term capital gains and short-term capital gains, which are taxed at different rates
  • Dividend income: divided into qualified and nonqualified dividends
  • Capital losses: losses from stocks can be used to offset taxable ordinary income, such as wages, thereby reducing the tax you owe

Capital Gains: Long-Term vs. Short-Term

Capital gains are one of the most common types of income from stock investing. For example, if you bought one share for $10 at the beginning of the year and sold it for $25 at the end of the year, your gain would be $15. Capital gains are split into short-term and long-term. If you held the stock for less than one year, the profit from selling it is a short-term gain. If you held it for more than one year, it is a long-term gain. The biggest difference is the tax rate that applies:

  • Long-term gains: The tax rate depends on your income bracket, with rates of 0%, 15%, and 20%. The chart below shows the 2021 long-term capital gains tax brackets. As you can see, if you file as single and your income is under $40,000, you owe no tax. Most people in the $40,000-$400,000 range pay 15%.
  • Short-term gains: Short-term gains are added directly to your total income for tax purposes. In other words, stock gains are effectively taxed at the highest marginal tax bracket you reach. The chart below shows the 2021 tax brackets for a single filer. As you can see, even if you have no other income and only short-term stock gains, the tax rate starts at 10%. If your salary is above $40,000, you will pay at least 22%. And if it is above $16,000, you will pay 32%. Compared with long-term gains, short-term gains can be taxed much more heavily.

From a tax-rate perspective, if stock trading is not your full-time job, it is generally better to aim for long-term gains when possible. Of course, market movement still matters most, and sometimes you need to sell when the time is right. Another important point is that this gain is only calculated when you actually sell the stock. If you continue holding the stock without selling, your realized gain remains $0 and there is nothing to report for tax purposes. What if some stocks are down while others are up? We will cover that in the section on tax treatment of losses below.

Most brokerage platforms will send you a 1099-B before tax season starts, or you can usually download it from the documents section of your account. From that form, you can easily see how much of your gains are long-term and how much are short-term. We will discuss wash sales in more detail in the section on losses.

Dividend Income

Dividend income is also very common. In general, dividends are divided into two categories: qualified and nonqualified.

Qualified dividends generally refer to dividends that:

  • Are paid by a US company or a qualified foreign entity
  • Meet the IRS definition of a dividend. For example, this excludes things like insurance premium refunds, annual patronage dividends from credit institutions, or “dividends” from cooperative apartments or tax-exempt organizations.
  • Meet the required holding period. Generally speaking, during a 121-day period, you must have held the stock for more than 60 days (starting 60 days before the most recent ex-dividend date; you must own the stock on that date).

Qualified dividends are taxed at lower rates: 0%, 15%, or 20%, depending on your income bracket. The chart below shows the 2021 tax rates for dividend income, which appear to use the same brackets as long-term capital gains.

The tax treatment of nonqualified dividends is similar to that of short-term gains. The income is added directly to your total income and taxed at your highest applicable marginal rate. That said, dividend amounts are usually not very large, so there is generally no special need to change your trading habits just for dividend tax planning.

Dividends are usually reported on Form 1099-DIV (in rare cases on K-1), and you generally receive the form only if your dividends exceed $10. Form 1099-DIV will list both your total dividends and your qualified dividends.

Tax Reporting for Losses

As mentioned above, capital gains are taxable. But what happens if you have losses? The IRS has a relatively favorable rule: investment losses can be used to reduce your taxes. The basic rules are as follows:

  • In each tax year, you can deduct up to $3,000 in losses, and those losses directly reduce your total income for tax purposes (if filing as married filing separately, the limit is $1,500 per person).
  • Any excess losses can be carried forward to the next year, but you can still use only up to $3,000 per year until the losses are fully used up.
  • The losses here are calculated based on all gains and losses from sold stock investments.

What if some stocks are down and others are up? Keep the following in mind:

  • Stock sales across all platforms are calculated together.
  • Long-term gains are first netted against long-term losses, and short-term gains are first netted against short-term losses.
  • The remaining gains and losses are then netted against each other regardless of whether they are long or short term.
  • Any amount still remaining is then netted against the prior year's remaining loss carryforward, again regardless of whether it is long or short term.

For example, Xiao Ming had a $7,000 stock loss in 2020 and $10,000 of wage income. In 2021, on Moomoo he had $5,000 in long-term gain and $3,000 in short-term gain; this year on Robinhood he had $3,000 in long-term loss and $4,000 in short-term loss.

  • When filing 2020 taxes, he can deduct at most $3,000 of losses, so his taxable total income is effectively $7,000. The remaining $4,000 loss is carried forward into 2021.
  • When filing 2021 taxes, long-term and short-term amounts are first netted separately, resulting in a total long-term gain of $2,000 and a short-term gain of -$1,000. They are then netted against each other, leaving a long-term gain of $1,000. This is then offset by the remaining $4,000 loss from 2020, leaving a $3,000 loss. So when filing taxes, he can report a $3,000 loss.

Since we're discussing losses, we also have to mention wash sale rules. Some people may try to game the system by selling a stock with a long-term loss at year-end to offset gains from other stocks, then buying it back the next year depending on the situation. That is a typical wash sale, and that portion of the loss cannot be used to offset income. The definition of a wash sale is as follows:

  • wash sale: selling a stock within 30 days after buying it, or buying it again within 30 days after selling it. In other words, if there is a purchase within 30 days before or after the sale, it counts as a wash sale.

On Form 1099B, you can clearly see a line for wash sale loss. When calculating taxes, you cannot include that amount as a deduction against income. Each platform will send you a 1099B, and when filing taxes you can add them all together to calculate your taxes.

Non-taxable Accounts

For most investment platforms, capital gains tax and dividend tax are the two main taxes on stock investing. However, some investments are held in accounts that are not currently taxable. For example, IRA, 401(k), and other tax-advantaged accounts are not taxed as long as the money stays inside the account and is not withdrawn. In a traditional IRA, the gains are tax-deferred, while in a Roth IRA, they are tax-free.

Of course, if you have losses in these non-taxable accounts, those losses also cannot be used to offset taxes.

Tax-Saving Tips

Based on the tax rules explained above, we can summarize a few stock investing tax-saving strategies. That said, stock investing should still be driven mainly by the investment itself, so don't let tax considerations alone affect your decisions.

  • Try to hold a stock or fund for the long term whenever possible, so both capital gains and dividends may be taxed at lower rates.
  • If your stock income is high this year and you have a lot of short-term gain, you can selectively sell some long-term losing positions that you were already planning to exit, and use the capital loss to offset the higher-taxed short-term gain.
  • Similarly, if your salary and bonus are especially high in a given year, you can selectively sell some long-term losing positions that you were already planning to exit, and use the capital loss to offset higher-taxed wage income.
  • If you realize near year-end that your stock gains are already very high for the year, you can consider waiting until the next year to sell some positions. This may help them qualify as long-term gain and may also smooth out your income across years.
  • If cash flow is not a concern, prioritize maxing out your IRA, 401(k), and Roth IRA and doing your investing inside those accounts.

Non-US Residents

Submit Form W8-ben

Brokerages generally require you to sign either a W9 or W8-ben when opening an account, and then they will issue the corresponding tax forms based on your status. If you sign W8-ben, you generally will not receive these tax forms. If you sign W9, you will receive forms such as 1099B and 1099div.

If you originally studied in the US and were a resident when you opened the account, but later returned to your home country and became a nonresident, the most important thing is to contact the investment platform first, tell them that you are a foreign person or NRA, and submit Form W8-ben to declare your foreign status. The brokerage will update your status and then issue the corresponding tax forms. For example, the Moomoo APP supports converting an RA account to an NRA account. Required materials include a W8 form, a photo of you holding your ID, a photo of you holding your SSN, and other information. If you need this, you can email [email protected], and customer service will ask for the relevant materials based on your situation.

Nonresidents Living in the US

As mentioned earlier, certain visa holders, such as students in the US on F1 visas or visiting scholars on J visas, may still be considered nonresidents even if they meet the SPT test. The IRS provides tax guidance for this situation:

In short, for capital gains tax:

  • This applies to students or scholars holding F, J, M, or Q nonimmigrant visas, as well as employees of international organizations or foreign government offices in the US.
  • If you are only in the US temporarily and do not intend to stay for at least 1 year, you are not covered.
  • If you were physically present in the US for 183 days during the tax year, you must pay capital gains tax at a flat 30% rate.
  • When filing taxes, capital gains are reported on Schedule NEC, together with Form 1040NR.

For dividend income, under the tax treaty between China and the US, this income is taxed at 10%, and the form used is also Schedule NEC. One reminder: if you have already submitted W8-ben, the brokerage will not send you a 1099B, so you will need to calculate your own short-term and long-term capital income based on your trading records, and check your statements for dividends. In short, it is fairly complicated.

Nonresidents Not Living in the US

If you are not in the US or do not meet the 183-day presence requirement above, the tax treatment is relatively simple. First, you still need to submit Form W8-ben when opening the account, or update it later, to declare your foreign status. Because the US has reciprocal tax treaties with many countries, the applicable tax rate varies depending on your country. For Chinese nationals or people in China, stock capital gains are tax-free, while dividend tax is 10%. In general, as long as you have submitted W8-ben, taxes will be withheld based on your Chinese nationality at a 10% dividend tax rate, so the amount you receive has already had withholding applied.

How to File Taxes

U.S. Residents

If you do a lot of stock investing, you will probably use tax software to file. What you need to do is download the relevant tax forms from each brokerage platform, usually 1099-B and 1099-DIV (or K-1). Most common tax software supports importing PDF versions of these tax forms, and then you can file your taxes directly.

Filing by yourself is also totally doable. After downloading the required tax forms, find Schedule D that goes with Form 1099, then fill in the relevant information from 1099-B. If you file by mail, just attach the 1099-B forms from all of your brokerages. It is very straightforward.

For example, on Robinhood, which I have used before, you can view tax documents on the statement page.

In general, each platform will provide the required tax forms before tax filing officially begins. For example, for tax year 2021, the schedule for Moomoo APP to provide tax forms was as follows:

  • - Tax forms 1099-DIV, 1099-INT, and 1099-MISC were to be provided by January 31, 2022;
  • - Tax form 1099-B was to be provided by February 15, 2022;
  • - Tax form 1042-S was to be provided by March 15, 2022;

For common questions, see: https://fastsupport.fututrade.com/hans/category11020/scid11021

Special Situation for Non-U.S. Residents

As mentioned earlier for students or visiting scholars, although they cannot file as residents (RA), if they have been in the U.S. for at least 183 days in a year, they may still be subject to a mandatory 30% tax. When filing, if the brokerage does not provide 1099-B, you will need to calculate your long-/short-term gain based on your trades and then fill out Schedule NEC.

Dividend tax should also be entered on Schedule NEC. Under the U.S.-China tax treaty, the tax rate is 10%.

Non-U.S. Residents

For people who are not in the U.S., generally speaking, after submitting W-8BEN, the brokerage will automatically calculate the amount to withhold based on your nationality and the relevant tax treaty between the U.S. and your country. For example, if you are in China and invest in U.S. stocks, there is no capital gains tax, while the 10% dividend tax will be automatically withheld by the brokerage. You do not need to file any additional tax return.

For example, on the Moomoo investment platform that I used before, you can go to [www.Fututrade.com] - [Login account] - [My Account] - [Documents] to view and download tax forms.

Summary

In fact, tax filing related to U.S. stocks is not that complicated. I suggest reading through the relevant guidance based on your own status and understanding the basic principles.

I am not a professional CPA either, so if there are any mistakes in this article, please let us know and we will correct them right away. Thank you!