Tax Prep Tips for Investors

Even if you hire a professional to file your income taxes, there are still things you’ll need to consider. Here are my tax prep tips for fellow investors.

David Moadel - Author

Jan. 2 2020, Published 3:57 p.m. ET


Another year of investing has come and gone, and now it’s time to pay the taxman. I know it’s not your favorite time of year, but we all have to deal with it. Even if you hire a tax preparation service to do your taxes, there are still things you’ll need to consider.

The worst thing you can do is avoid thinking about your investment taxes until the last minute. Waiting until mid-April is only asking for trouble. You’ll be panicky, and you won’t have time to find the necessary documentation. And this delay can lead to costly errors. It could also cause you to be late with filing your taxes. Luckily, investors can generally avoid all these problems.

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Instead of putting it off until later, you can be more proactive. Whether you choose to file yourself or have a professional do it for you, there are steps you can take today. Plus, there are things you can do to make the whole process easier. For investors, it just requires a little foresight and organization, and you’ll be glad you took action ahead of time.

Before we begin, please note that the following is not tax advice, and you should consult a licensed, certified tax return professional for any questions or before taking any action.

Should you hire a professional for tax prep?

One thing to consider sooner rather than later is whether you should use the services of a tax prep professional. And you’ll want to make this decision by February or March—not halfway through April. By then, a highly qualified tax professional will be booked solid. You’ll be lucky to find a tax-prep professional at any price during that time.

If you did wait until there are just a couple of weeks left before tax day, this factor is a major consideration. In this case, you’ll probably want to go ahead and book the services of a professional tax preparer. They’ll usually be able to fill out the necessary forms faster and more accurately than you could in such a short timeframe.

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For investors in particular, hiring a professional can fill in whatever knowledge gaps you might have. For instance, some people assume they can automatically deduct $3,000 worth of capital losses from their unprofitable investments. However, it’s actually only $1,500 if you’re married and filing a separate tax return.

That’s the type of detail that investors can’t afford to miss. A qualified tax prep professional is like a safety net who will catch omissions like this. Do-it-yourself tax software might also catch errors, but ultimately, the IRS will hold you responsible. So, if your knowledge has a lot of gaps when it comes to income tax generally or the takeaways for investors, it’s probably worth the investment to hire a qualified tax professional.

Getting your tax prep documents ready

As an investor, you’ve experienced capital gains as well as capital losses on your investments throughout the year. And it’s a smart idea to keep your own trading journal or diary throughout the year. This journal should document all of your purchases, sales, and gains or losses. You’ll want to record dates, quantities of shares or contracts et cetera, and other pertinent information.

Chances are, you haven’t been doing this process all year long. But I recommend that you start this practice as soon as possible. Otherwise, you’ll depend wholly on your broker to accurately maintain all of this information.

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The IRS will expect you to report your investment gains or losses on a Schedule D (Form 1040), Capital Gains and Losses. You’ll also need to report them on Form 8949: Sales and Other Dispositions of Capital Assets. And if you haven’t documented your investment transactions throughout the year, don’t worry. Your broker most likely did this step for you.

Your broker will usually send you a Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. This form won’t document every single investment you made. Instead, it’s just a general report of your total capital gain or loss. If you used more than one investment broker, you should usually expect to receive this form from each broker.

That form is the main documentation you’ll need. If you don’t receive a Form 1099-B from each investment broker you worked with by the end of February, you’ll probably want to contact them. Also, you might wish to contact them if your records don’t match up with theirs. But again, you can only catch that kind of discrepancy if you’ve been documenting your investments throughout the year.

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Other ways to get organized for tax season

If the tax year has come and gone, there are some things you can’t do anymore to reduce your investment taxes. For instance, it would be too late to contribute more to a tax-deferred IRA or pension plan. Still, even after December 31, there are things you can do to get ready for tax time.

For example, you’ll want to take note of any dividends you’ve received throughout the year. Hopefully, any dividend payments will be reported to you via a Form 1099-DIV, Dividends and Distributions, or possibly a Schedule K-1. You’ll most likely need to report dividend income on your regular tax form, such as a Form 1040. And in some cases, a Schedule B form may also be required.

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You can also contact your employer for any information concerning your investment accounts with them. Many workers aren’t even aware of how much they’ve contributed toward their 401(k), for example. This is the type of information you’ll want to monitor throughout the year and confirm at year’s end.

Finally, if you did choose to invest in computers, software, and other items to help you monitor your investments, look for the receipts. Those receipts might come in handy in case you want to make qualified deductions. But be cautious with tax write-offs, however. Be sure that each deduction is 100% justified and legitimate.

No need to fear tax prep season!

The main theme here is preparing for tax prep season throughout the year. Simply by monitoring your investments and related transactions, you can reduce your tax-time stress. And best of all, you might be able to save money that you can then use in your future investments—whether that means stocks, silver and gold, or simply planning for a comfortable retirement.


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