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Capital Gains

If I make periodic contributions to my brokerage account and take no withdrawals as it appreciates do I start paying capital gains tax after I withdraw more than the sum of my contributions?

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7 Replies

Capital Gains

What you described is simply not the way capital gains (or losses) work for the purposes of IRS reporting.

 

You need to report all sales that occur within your account on your income tax return, which sales will typically be reported to you on a tax reporting statement (such as a 1099-B).

AnthonyC CPA
Employee Tax & Finance Expert

Capital Gains

If you contribute to a non-retirement brokerage account and receive dividends you may be required to pay income taxes even if you do not withdraw from the account.  Dividends that are reinvested will be taxed in the year received but will increase the cost basis of the security or mutual fund that you purchased and thereby reduce the amount of the gain when you sell the position. When you sell a position in a non-retirement brokerage account you will either have a gain or a loss when you compare the adjusted cost basis to the proceeds of the sale.

 

Hope this helps answer your question.

AnthonyC_CPA

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Capital Gains

I pay capital gains as long as the ETF appreciates?

Ex: I contribute $200,000 in an ETF. The value appreciates to $400,000 over time. Then I withdraw $100,000.

I still pay at capital gains even though I am still under my contribution amount?

Capital Gains


@MalikHenry wrote:

I still pay at capital gains even though I am still under my contribution amount?


Again, your contribution amount is irrelevant.

 

However, you will not pay capital gains tax on unrealized gains. Therefore, you would have to actually sell $100,000 worth of the ETF (in your example) before you would even have to report the gain.

AnthonyC CPA
Employee Tax & Finance Expert

Capital Gains

You do not pay tax when an ETF appreciates in value until you sell any portion of the ETF unless you receive a dividend.  In your example you would not pay tax on the appreciation of the ETF until you sell part of it.  Once you sell, the cost basis on the shares that you sell will be compared to the proceeds received and you will pay tax on that amount.  The brokerage firm should provide you a 1099 tax form with the cost and proceeds.

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Capital Gains

If the contribution amounts are irrelevant the cost basis is though. If I make periodic contributions that means I will be buying the ETF at a different cost basis each time. When I decide to make periodic withdrawals of the ETF shares, the capital gains will be calculated using the market value and the cost basis of the oldest shares at the time of sale? Then the next withdrawal will use the cost basis for the new oldest set of shares I sell?

Capital Gains

Okay makes sense now. The brokerage firms keeps track of the cost basis of the sold shares. Thank you

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