How are investments in a taxable brokerage account taxed?

It depends on how the investment generates money.

Generally, taxes inside a taxable investment account fall into a few main categories: interest, dividends, realized capital gains, and unrealized capital gains.

Interest from investments such as bonds and money market funds is generally taxed as ordinary income. Qualified dividends generally receive more favorable long-term capital gains tax rates, while nonqualified dividends are generally taxed as ordinary income.

Capital gains work differently. If an investment increases in value but you don’t sell it, you have an unrealized gain, which generally isn’t taxable yet. Once you sell the investment for a profit, the gain becomes realized and may be subject to capital gains tax.

How long you’ve owned the investment also matters. Investments held for one year or less generally generate short-term capital gains, which are taxed at ordinary income tax rates. Investments held for more than one year generally qualify for long-term capital gains rates.

And here’s something investors sometimes misunderstand: when you sell part of an investment, the entire withdrawal isn’t necessarily taxable. You’re generally taxed on the gain associated with the shares you sold—not the full amount you withdrew.

That’s why taxable accounts can be more tax-efficient than many people realize.

The key is understanding cost basis, holding periods, tax lots, dividends, and how your investments generate income. Good tax planning isn’t something you do once a year. It’s something that should be considered throughout the year as investment decisions are made.