How a Taxable Brokerage Account Works: Dividends, Capital Gains and Tax-Loss Harvesting

A taxable brokerage account is the ordinary investment account you can open at any broker. It has no tax break: you pay tax on dividends and interest every year, and on gains when you sell. But it also has no limits and no rules about when you can take money out. For many investors it is the account that holds the most money after the 401(k) and the IRAs are full. This guide explains how it is taxed, how to lower that tax, and when it is the right account to use. All figures are for 2026.

Why use a taxable account

A 401(k), an IRA and an HSA all give you a tax break, but they all have limits and conditions. A taxable account has none of them:

• No contribution limit. You can put in any amount, every year.
• No lock. You can take money out at any time, at any age, with no penalty.
• No income limit and no required withdrawals.
• Any investment. Stocks, ETFs, funds, bonds, and anything else your broker lists.

That makes it the account for money you may need before 59½ (a house, a business, an early retirement), and for savings above the limits of the other accounts.

How dividends are taxed

Every dividend you receive is taxable in the year it is paid, even if you reinvest it. Your broker sends you a Form 1099-DIV, which splits your dividends into two types.

• Qualified dividends. Most dividends from US companies and many foreign companies, if you held the shares long enough (more than 60 days in the 121-day window around the ex-dividend date). They have the lower long-term rates: 0%, 15% or 20%.
• Ordinary (non-qualified) dividends. For example most REIT dividends, interest-like payouts from money market funds, and dividends on shares you did not hold long enough. They are taxed at your ordinary bracket.

Interest from cash and bonds is ordinary income too. Interest on US Treasuries is free of state income tax, and interest on most municipal bonds is free of federal tax.

How capital gains are taxed

When you sell for more than you paid, the gain is taxable in the year of the sale. The holding period decides the rate:

• Held one year or less: a short-term gain, taxed at your ordinary bracket.
• Held more than one year: a long-term gain, taxed at the lower rates.

You pay nothing on a gain until you sell. A stock that rises for 20 years and is never sold pays no tax on that rise for 20 years.

The 2026 rates for long-term gains and qualified dividends

The thresholds are on your total taxable income, after the standard deduction, not on your investment income alone. The figures come from IRS Revenue Procedure 2025-32.

The 3.8% net investment income tax

Above a modified adjusted gross income of $200,000 (single) or $250,000 (married filing jointly), a 3.8% tax applies to your investment income: dividends, interest and gains. It applies to the smaller of your investment income and the part of your income above the threshold. These thresholds are not indexed to inflation. See the IRS questions and answers on the NIIT.

Foreign dividends and the foreign tax credit

When a foreign company pays you a dividend, its country often withholds tax first. In a 401(k) or an IRA, that withholding is lost. In a taxable account, you can get it back: the foreign tax credit lowers your US tax by the amount withheld abroad, up to the US tax on that income. For small amounts (up to $300 single or $600 joint), you can claim it directly on your return. Above that, you use Form 1116.

This is the one area where a taxable account beats a retirement account. If you hold foreign stocks or international funds with high withholding, the taxable account is often the better home for them. Read more in what is dividend withholding tax.

Tax-loss harvesting

When an investment falls below what you paid, you can sell it, record the loss, and buy a similar (but not identical) investment, so your portfolio stays almost the same. The loss lowers your tax:

1. Losses first offset gains of the same type, then the other type.
2. If your losses are larger than your gains, up to $3,000 a year ($1,500 married filing separately) offsets your ordinary income.
3. The rest carries forward to later years, with no time limit.

The wash-sale rule

The IRS does not let you sell for a loss and buy the same thing back at once. If you buy the same or a substantially identical security within 30 days before or after the sale, the loss is disallowed for now. It is added to the cost of the new shares, so you get it back when you sell them later. Purchases in your IRA count too. The rule is in IRS Publication 550.

A common approach is to swap one index fund for another that follows a different index, for example an S&P 500 fund for a total US market fund.

Asset location: what to hold where

If you have a 401(k), IRAs and a taxable account, where you hold each investment changes your tax bill. A common guide:

What happens at death

At death, most investments in a taxable account get a step-up in basis: their cost becomes their market value on that day. Your heirs can sell at once with no tax on the gain you built up. This makes a taxable account a good account to leave to heirs, unlike an HSA or a traditional IRA. Estate tax applies only above $15,000,000 per person in 2026.

Track your taxable account with the rest of your portfolio in Cadances

Most investors have a taxable account next to a 401(k) and one or two IRAs, often at different brokers. Cadances is a portfolio tracker: it puts all of them in one place and gives you one total, one allocation and one performance figure.

• The tax, worked out the way the IRS works it out. For US residents, the Tax screen splits your dividends into qualified and ordinary, taxes long-term gains on the 0/15/20 ladder and short-term gains at your ordinary bracket, and adds the 3.8% NIIT above the threshold. Enter your MAGI and the box 1b total from your 1099-DIV for a more precise figure.
• The foreign tax credit, sized for you. A Form 1116 worksheet shows the tax withheld by each country and the credit you can claim against it.
• Possible wash sales, flagged. The Tax screen warns you when a sale at a loss and a new purchase of the same security fall within the 30-day window.
• Every account in one view. Import the export file from each broker, or add your holdings by hand. Your taxable account, your 401(k) and your IRAs sit side by side, so you can check your asset location and your total allocation.
• Performance and allocation. On Performance, compare your accounts with the S&P 500 over the window you pick. Set allocation rules on each portfolio and see when your mix drifts away from your target.

On the Elite plan, the declaration helper maps each figure to its exact line on Form 1040, Schedule B, Schedule D, Form 8949, Form 1116 and Form 8960, and pre-fills the official forms for you to check.

One limit to keep in mind: Cadances sees only the accounts you add. A wash sale in an account you did not add, or a loss carryforward from before you started, is not in its figures.

Start free. Create your Cadances account: no card, no time limit. The Free plan holds one portfolio of up to 15 holdings. To track your taxable account, your 401(k) and your IRAs side by side, compare the paid plans.

The bottom line

• A taxable account has no tax break, but no limits and no lock.
• Qualified dividends and long-term gains have the 0/15/20 rates; the rest is ordinary income.
• Above $200,000 single or $250,000 joint, add the 3.8% NIIT.
• Hold foreign stocks and broad index funds here; hold bonds and REITs in your 401(k) or IRA.
• Harvest losses to lower your tax, and respect the 30-day wash-sale window.
• Your heirs get a step-up in basis.

Each monthly purchase is dollar-cost averaging by design, and a diversified mix across all your accounts matters as much as the amount you put in.

This article is general information, not tax or legal advice. Your own situation decides which rules apply to you.