Income impact


Investing in stocks can impact your income mainly through dividends, capital gains distributions, and the actual gains realized when selling stocks. This is typically reported on your tax return as taxable income. Dividends, for example, are payments made by companies to shareholders and are subject to taxation. Similarly, capital gains distributions—which occur within mutual funds from the sale of stocks—and actual gains from selling your shares are taxable events.

One point of consideration is reinvesting dividends back into purchasing additional shares. While this reinvestment still counts as income and needs to be reported for tax purposes, the money isn’t directly received as cash; instead, it's used to increase your investment holdings. Despite the repurchase, all dividends received are considered taxable income and must be declared on your tax return1.

Taxable Investment Income

Sean and Jonathan discuss the different ways investments are taxed, including dividends, capital gains distributions, and actual capital gains when selling. They emphasize that regardless of how the income is used, it is still taxable. They also highlight the benefits of retirement accounts for avoiding current taxation on dividends.


332 | Transform Your Tax Return Into a Springboard for Financial Planning