When You Sell Stock, Do You Pay Tax on Dividends with Each Sale? What Happens If You Sell, Then Buy Back, Etc.?

The financial services industry employs millions of Americans and adds trillions of dollars to the economy. The innovative financial products first created and tested in the laboratories of Wall Street have spread across the globe and enriched millions of traders and investors in virtually every country on the planet. In fact, the financial systems of most capitalistic countries mimic that of the United States due to this country's successful harnessing of the profit motive.

Then again, the complex global financial system can be daunting for the average retail investor. Unless you have professional financial training, you probably have dozens of questions about your investment portfolio. After all, it's likely that you have a day job in addition to family and personal obligations. You can't be expected to manage your investments on an active basis while simultaneously worrying about all of your other problems.

Unless you're dealing with a tax-protected retirement account, you're likely to lose a significant amount of the pre-tax profit that you earn on your stock investments due to various federal and state taxes. With a keen understanding of the tax code, you may be able to mitigate these losses and keep a greater share of the earnings from your investments.

There are two basic types of stock-related income: dividends and capital gains. Certain stocks, funds and other equity products throw off dividend payments on a quarterly, semi-annual or annual basis. On an annual basis, these payments can vary from less than 1 percent to more than 10 percent of a stock's value.

Under current federal regulations, dividend payments are taxed as regular income. Although different states have different schemes for measuring and taxing dividends, most adhere to this general framework. Dividends are typically taxed as income for the year in which they're paid. You'll be expected to report any dividend payments that you receive during the course of the year with a 1099-DIV or other special tax form.

Since dividends count as regular income, you're required to pay taxes on them on an ongoing basis. You can't wait until you sell the stock to pay all of the taxes that you owe on these dividends. However, you're no longer responsible for paying taxes on any continuing dividends from stocks that you no longer own. On the other hand, you're responsible for paying taxes on capital gains only after you sell the stock. Like dividend taxes, capital gains taxes are assessed for the tax year during which the gains post to your account.

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