3 Common Tax Mistakes First-Time Investors Make

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  • Ten million brokerage accounts were opened in 2020, and 55% of Bitcoin investors started in 2021.
  • One expert says most first-time investors are “surprised” by the tax complications that arise.
  • First-time investors might want to hire an accountant, or splurge on more expensive software this season.
  • Read more stories from Personal Finance Insider.

There are a lot of first-time investors around.

The Wall Street Journal reported that 10 million brokerage accounts were opened in 2020, and, according to a study conducted by Grayscale Investments, 55% of Bitcoin investors started in 2021.

With the boom in investing during the pandemic, first-time investors may be surprised at how 2021’s gains or losses affect them during tax season.

We asked Dominique Broadway, personal finance expert at Finances Demystified, for three common tax mistakes that first-time investors usually make.

1. Neglecting to plan ahead

“I don’t know why, but first-time investors don’t realize they actually have to pay taxes on their earnings,” Broadway tells Insider.

When Broadway says earnings, she means the money you make from selling your investments at a profit or by collecting dividends. Long-term investments left to grow year over year aren’t taxed, unless you take them out of the market.

Capital gains are the profits you make from your investments each year, and they are taxed differently than regular income. Short-term gains, profit from a sale of investments in the last year, are taxed as regular income up to 37%. On the other hand, long-term gains are profits from sales of investments that you’ve held for over a year. Long-term gains are taxed at lower rates than short-term gains.

2. Forgetting to write off losses

“If you had losses during the year, you can write those off and reduce your taxable income,” Broadway explains. 

Again, this is for investments you sold that year, not for changes in your portfolio. If you had both


capital gains

and capital losses, you can subtract your losses from your gains and lower your taxable


investment income

. For example, if you sold TSLA with a profit of $15,000 but sold GME at a loss of $5,000, your taxable capital gains is lowered to $10,000.

If you only had capital losses, you can offset up to $3,000 from your ordinary W-2 or self-employed income.

3. Trying to do taxes on their own

Broadway explains that the biggest tax mistake first-time investors make is filing on their own. “If you’re starting to invest, that’s great,” says Broadway. “But make sure you also invest in someone who’s well-versed in taxes.” 

Instead, she suggests hiring an accountant to help you, or upgrading to a deluxe tax preparation package from companies like H&R Block or TurboTax. “I love personal finance, but I do not study the tax codes in the same way an accountant does,” adds Broadway. “The tax codes are constantly changing. It makes a lot of sense to hire a professional to make sure you’re not overpaying taxes.”

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