Understanding Stock Taxes: Capital Gains & Dividends | [Year]

It doesn’t come as a surprise to most people that they have to pay taxes on the income that they earn working their job. Some people are surprised, however, when they learn that taxes must be paid when they earn money investing in the stock market.

Read More: How to Reduce Taxable Income in 2020: Can The Average American Pay No Taxes?

Main Types of Taxes Paid on Stocks

There are two main types of taxes paid on stock earnings: capital gains taxes and taxes on dividends. Capital gains taxes are typically the most common type of tax paid on stock earnings. They are assessed on profits earned when stocks are sold.

Taxes on dividends, meanwhile, must be paid if a stock pays out dividends to investors. Ordinary dividends are taxed at ordinary income tax rates, while qualified dividends that meet certain criteria are taxed at lower capital gains tax rates. Note that dividends earned in a qualified retirement account such as a 401k or IRA are not taxable.

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