For Investors

Most new investors make the mistake of throwing away all those annual statements after your taxes are done. You have to keep those for as long as you have the investment. Here's why:

Investments are taxed in a couple of ways. The dividends you receive are taxed as "ordinary income" in the year you receive them. The profit on your investment is taxed as "capital gain" in the year you sell it. So, your sale price, minus your purchase price, is your capital gain. The sale price and any dividends are reported to IRS on your 1099 forms. The tricky part is keeping track of the purchase price, which is not reported to IRS, and not always reported to you, either.

Many companies pay dividends on a regular or occasional basis. Many of those have automatic reinvestment plans, where they use your dividends to buy you more stock on a quarterly basis. This is especially common among mutual funds. This is a taxable dividend, just as though you had received a check. And the purchase price on the new shares will be reported on those annual statements. You'll need those when you sell the shares.

Many people with mutual fund accounts like to treat them like bank accounts. The IRS doesn't. Every "withdrawal" is a sale of stock, which means we have to figure out what you bought those shares for.

If you participate in an employee stock purchase plan, you will need to keep all the letters (in some cases, pay stubs, too) which show how much you paid in, and how much the company reported on your W-2.

There are many places, on the Web and elsewhere, where you can learn to keep track of your stock purchases. But if you don't have any record of the purchase, you'll have trouble convincing Uncle Sam that your $15,000 stock sale was actually a loss.