When it comes to managing wealth, one of the biggest opportunities for improving returns isn’t just what you invest in—but where you hold those investments. Understanding the taxation of taxable (or “non-qualified”) accounts helps you keep more of what you earn after taxes, making it a cornerstone of comprehensive financial planning.
The Basics: Ordinary Income vs. Capital Gains
Investment income falls into two broad categories: ordinary income and capital gains. Ordinary income includes wages, interest, and non-qualified dividends—these are taxed at your standard income tax bracket, which can range from 10% to 37%.
Capital gains, on the other hand, receive special treatment. When you sell an investment, your gain (or loss) depends on how long you held it:
- Short-term capital gains apply to assets held for one year or less and are taxed at ordinary income rates.
- Long-term capital gains apply to assets held for more than one year and are taxed at preferential rates—0%, 15%, or 20%, depending on your income level.
This difference can have a major impact on your bottom line. A long-term approach to investing doesn’t just smooth volatility—it can also dramatically lower your tax bill.
Understanding Dividends, Interest, and Distributions
Different types of investments generate income in different ways, and each has unique tax implications:
- Dividends – If they meet certain requirements, they’re considered qualified and taxed at the lower capital gains rates. Non-qualified dividends are taxed as ordinary income.
- Interest Income – Interest from savings accounts, CDs, or corporate bonds is fully taxable, while interest from municipal bonds is generally exempt from federal taxes—and sometimes state taxes as well.
- Capital Gains Distributions – Mutual funds distribute realized gains to investors at year-end, even if you didn’t sell your shares. ETFs are typically more tax-efficient because of how they’re structured.
Netting Gains and Losses
When you sell investments, the IRS looks at your net capital gains—your total gains minus any losses.
If your capital losses exceed your gains, up to $3,000 can be used to offset ordinary income each year, and unused losses can carry forward indefinitely. This is why tax-loss harvesting—strategically selling losing investments to offset gains—can be a powerful year-end strategy.
Special Considerations
- Collectibles like art, coins, or precious metals are taxed at a higher long-term capital gains rate of up to 28%.
- Cryptocurrency is treated as property, meaning gains are taxed under capital gains rules—but it’s not subject to the wash-sale rule, which can offer additional planning opportunities.
- Real Estate investments often generate ordinary income (through rent) and may qualify for a 20% Qualified Business Income (QBI) deduction. When sold, they’re subject to capital gains and possible depreciation recapture.
The Takeaway
Taxable investment accounts play a vital role in a diversified financial strategy. They offer flexibility, liquidity, and potential long-term growth—but smart tax planning can make all the difference in after-tax performance.
At Liberty One Wealth Advisors, we help clients integrate investment selection with proactive tax management—aligning portfolio design, timing of sales, and asset location to minimize taxes and maximize wealth over time.
The information in this message is not meant to be exhaustive nor is it guaranteed to be secure or error-free. None of Liberty One Wealth nor any of its affiliates guarantees the accuracy of any statements, qualitative or numerical, contained herein. This message is provided for informational purposes only and should not be construed as a solicitation or offer to buy or sell any securities or related financial instruments. This communication does not constitute legal or tax advice and should not be construed as such. Inquiries concerning legal or tax-related issues should be discussed with an attorney or tax advisor.
