If you have investments, you will need to prepare a special set of documents to properly file your tax return. These investment tax documents show the key elements of your income, including interest, dividends, and capital gains, among others. While it may be easy to forget about investment income, the IRS will come after you if you don’t report all of your income.
Here’s how to prepare your investment tax documents and the most important things about your tax forms.
What investment tax documents do you need?
If you have a brokerage account, you will probably need at least three documents, although this will depend on the specific type of investments you have. Most investors will need to look for these important documents:
- 1099-INT
- This document reports the interest you earned at the specific institution.
- 1099-DIV
- This document lists the dividends you received from a brokerage.
- 1099-B
- This document reports capital gains and losses at a brokerage or crypto exchange, which are vital for calculating your capital gains taxes or getting a tax break.
Both banks and brokers will send you 1099-INT forms early this year. You will normally receive a 1099-DIV and 1099-B form from brokers before February 15 of each year. With brokers, these forms are often all in the same document, called a consolidated 1099, with a specific section for each of the above statements. Those working with a cryptocurrency exchange must also receive relevant 1099 forms for all income, capital gains and losses.
But some investors may receive other types of statements that they must submit, including:
- 1099-R
- This document reports income from retirement accounts such as a 401(k), IRA, pension or an annuity. You will also receive one if you transfer a pension scheme.
- 1099-MISC
- This document includes miscellaneous income from a brokerage firm or other institution, such as “payments in lieu of dividends or interest,” which had to be filed.
- Margin interest
- If you borrowed money from your brokerage into a margin account, your broker’s consolidated 1099 will report how much interest you paid, and you can write off these investment costs if you itemize your deductions on your return.
- Schedule K-1
- You will receive this form if you have invested in a partnership, regardless of whether it is private or listed. This states your income and investments in the partnership.
Other, more sophisticated investors may receive other types of statements reporting income.
Who provides tax forms for investors?
Your financial institution will provide the relevant forms on your behalf and must do so in a timely manner. These forms arrive at the end of January and then roll into February.
- Banks, brokers, crypto exchanges, insurance companies and other financial institutions will provide the relevant 1099 forms to customers.
- Brokers typically report miscellaneous income and margin interest as part of a consolidated 1099 that includes a variety of income.
- A partnership, including a publicly traded partnership, sends a K-1 statement directly to individuals.
If you trade in cryptocurrency and you do not receive a statement from your institution, you cannot avoid paying tax on capital gains. You must add up your profits and losses and then self-report the income. Don’t assume you can skip taxes because of a missing 1099.
Where can you stumble over tax documents when filing?
Given the wide range of forms, it is very important that you check whether you have received a tax statement for all your accounts. It can be easy to miss a form when you’re in a hurry or just forgot an account. Here are other important points to consider:
- Don’t submit an application too early, otherwise you will miss forms: If you file too early, you may miss important tax forms. While banks and other form providers may be required to submit forms by January 31, brokers and some others typically have until February 15. Even then, you may have to have the agent correct a form or refile your taxes later.
- Consolidated statements contain a lot of data: A consolidated 1099 from your broker can contain a lot of data – a 1099-INT, a 1099-DIV, a 1099-B and more – so make sure you’ve found all the data reported and entered it into your tax return.
- A 1099-INT may appear on your brokerage statement: It can be easy to miss, but your broker will typically have a 1099-INT for interest payments, so record that income.
- A 1099-DIV includes many types of payments: Investment income can come in many different forms and it is all reported on a 1099-DIV. Report it accurately.
- Qualified dividends and real estate income receive preferential treatment: Some types of investment income receive special treatment, such as lower tax rates. Make sure you don’t pay too much by correctly reporting the amounts received.
- A rollover means you get a 1099-R: If you roll over a 401(k) account or convert a traditional IRA to a Roth IRA, you will receive a 1099-R. The form might mean you owe taxes on the rollover, but it might not, if you do a backdoor Roth IRA, for example.
- Crypto exchanges should send you a 1099-B: If you have realized a profit or loss while trading cryptocurrency, you should receive a 1099-B statement from the exchange.
- You owe tax on crypto transactions and possibly on any crypto expenses: Even if you don’t receive a 1099, you’ll still owe taxes on the gains, but you can write off losses. Furthermore, spending cryptocurrency can result in a tax bill for you as you realize a gain or loss.
- You may need to tell the broker that he needs to correct something: Brokers sometimes get it wrong, so if you notice an error, you should ask the broker to issue a corrected form. For example, there may be an error with the way dividends are categorized.
- Sometimes documents arrive late in tax season or are corrected: You may receive a document for corrected forms late in tax season, even as late as April. If you have already filed, you will be forced to refile your tax return and include the new tax information.
These are some of the most likely places you’ll stumble through your tax forms, but tax forms are often so complex that it’s much easier to use tax preparation software to guide you through them.
In short
It’s essential that you have all your tax documents and fully report your income when it’s time to file your return. If you forget to file a document and the IRS has already received it, the agency will simply reduce your refund or ask you to cough up more money and possibly a fine. Therefore, prepare your documents carefully at the time of tax return, so that you are not faced with nasty tax surprises.
