If you sell investments at a loss, those losses can be used to offset taxable gains:

Suppose you realize a $4 gain on one stock and a $2 loss on another. Your net taxable gain is reduced to $2.

If your total capital losses exceed your gains, you can use up to $3,000 annually to offset ordinary income (like wages).

Any unused losses can be carried forward to future years to offset capital gains or up to $3,000 of ordinary income each year.

Dividend Income: Qualified vs. Nonqualified

In addition to capital gains, many investors receive dividends—which can also qualify for favorable tax rates.

Qualified dividends are taxed at the same rates as long-term capital gains: 0%, 15%, or 20%, depending on income level. Most dividends paid by U.S. companies fall into this category, provided holding requirements are met.

Nonqualified dividends, however, are taxed at ordinary income tax rates, just like short-term gains.

Knowing the type of dividends you receive—and planning accordingly—can help optimize your overall tax efficiency.

Final Thoughts

The way your investment income is taxed depends on several key factors: your income level, how long you hold your assets, and the timing of your sales. By paying close attention to holding periods, using strategies like tax-loss harvesting, and knowing the difference between qualified and nonqualified dividends, you can make smarter decisions that help minimize your tax burden and maximize your after-tax returns.

For personalized guidance tailored to your unique financial situation, contact Diamond Tax & Financial today. We’re here to help you invest smarter and keep more of what you earn.