How to Handle Complex Investment Income on Your Taxes This Year

If your income involves more than a single W-2, relying on a once-a-year visit to a tax preparer or DIY tax software is likely insufficient for accurate reporting.

Today, more than a third of Americans earn extra money through side hustles, investment income, real estate, or selling stocks or cryptocurrencies. This complex income requires ongoing tax planning to proactively reduce your tax liability and keep more of what you earn.

The critical mistake for those with complex income is poor recordkeeping, which can lead to problems with the IRS. Inaccurate reporting can also mean missing deductions, which could lower your tax bill or lead to a refund.

For example, business owners with pass-through entities that fail to report, assuming they didn’t make any money, can face failure-to-report penalties that amount to thousands of dollars and continue to accumulate, according to Joel Salas of Elevated Tax Strategies and an expert at JustAnswer.com.

“The best [tax] planning is not about finding a loophole; it’s just about making sure your basic records are ready to be audited,” Salas said.

In this guide, we detail the 2026 tax reporting rules for complex investments – including capital gains, partnerships, real estate income, foreign investments and 1099-K income – and offer general strategies to potentially reduce your tax burden.

While it’s always best to speak to a tax professional who can offer advice tailored to your finances, if you’re considering filing your own taxes, we recommend H&R Block or TurboTax, as both offer professional assistance with complex returns.

Nuances of capital gains reporting

If you sell real estate, stocks, cryptocurrencies, and even items like jewelry and collectibles for a profit, you are subject to capital gains tax. There are two types of capital gains tax: short-term and long-term.

Short-term capital gains occur if you make money on the sale of an investment that has been held for less than a year. The year is counted from the date the asset was purchased to the date it was sold. If you sell an appreciated asset on day 366, it is taxed at the long-term rate.

This can make a big difference for many people, since short-term capital gains are taxed at your marginal tax rate, just like your W-2 wages and other earned income. Long-term capital gains are taxed differently and the rate can be as low as zero.

The IRS considers capital gains and losses as a net total. If you have, for example, a $6,000 long-term gain from the sale of stock and a $4,000 short-term loss from the sale of stock, $2,000 of long-term capital gains income would be taxed at your taxable income rate, which is no more than 15% for most people.

Tax exception on capital gains: collectibles

Collectibles, including artwork, fine wine, jewelry, and coins (but not cryptocurrencies or NFTs), are taxed differently. You will pay long-term capital gains tax of up to 28% on the sale of these items if you hold them for more than a year. If you sell them before a year, you will pay your marginal tax rate.

However, be sure to take into account the initial price you paid, as well as any costs, fees, or commissions associated with the purchase. This is called cost basis. The higher your cost basis relative to the sales price, the less taxes you will pay.

“Basis tracking is one of the most important defensive strategies because capital gains tax is calculated on profits,” Salas said.

If you inherited the item, you can determine the cost basis using the fair market value of the item at the time of inheritance. If you sell the item after a year, your long-term capital gains are the sale price minus the fair market value.

Qualified Small Business Stock Exclusion

There is another exemption regarding long-term and short-term capital gains, and this one benefits taxpayers.

The qualified small business stock exclusion, or QSBS, applies to individuals who sell stock issued directly by a qualifying corporation with a tax basis of less than $50 million.

If the company had less than $50 million in assets when the shares were issued, taxpayers can deduct up to $10 million or 10 times the initial investment, whichever is greater, provided they held the shares five years or more before selling them.

This rule often applies to founders of technology and manufacturing C corporations. The IRS excludes many industries, including personal services (healthcare, legal, financial, and others), agriculture, mining or drilling, hospitality, and real estate.

Decoding pass-through entities and specialized forms

Form Schedule K-1 reports income from partnerships, S corporations, estates, and trusts. Owners of these pass-through entities can report their income on their personal tax returns and avoid double taxation.

A pass-through entity is one in which the business owner “passes through” profits and losses to their personal income tax, rather than paying corporate tax. Profits are reported as income (and divided in the case of a partnership) and taxed at the business owner’s marginal tax rate on their personal income tax forms.

K-1 forms often arrive after the January 31 deadline for other tax documents, such as W-2 and 1099 forms. Taxpayers can easily misreport their income, resulting in a larger tax liability.

“If the K1 reports income above your expectations, whether it’s wrong or just incomplete, you can end up paying taxes on money that doesn’t even constitute a profit, especially when other custodians have reported this basic tracking for you and it’s incomplete,” Salas said.

Some pass-through entity business owners think they don’t need to report or forget to include K-1 income on their tax returns. “I think the most common costly mistake is people forgetting to file, even though the K1 doesn’t move the needle,” Salas said.

Tax Benefits of Real Estate Investment Trusts

Real estate investment trusts, or REITs, offer tax benefits to investors and the investment company that owns them. A REIT must pay at least 90% of its taxable income as dividends, automatically reducing its tax liability and passing the savings on to shareholders.

For their part, REIT investors can deduct 20% of their dividends under the qualified business income deduction, or QBI, whether or not they itemize or take the standard deduction. REIT dividend income after the first 20% is taxed at the individual’s regular tax rate.

However, investors can also reduce their dividend income using the return on capital rule, or ROC. If a REIT dividend also includes a portion of operating income previously sheltered due to depreciation, that portion is not taxable. But using ROC to reduce taxable income also reduces the cost basis of that REIT, which could result in higher capital gains upon sale.

Master of Limited Partnerships

A master limited partnership, or MLP, is a type of pass-through entity in which investors (called master limited partners) can purchase shares and receive periodic income distributions.

MLPs operate in limited industries, typically those associated with natural resources or transportation, such as railroads. Investors receive a K-1 showing their distributions, so it is important to wait for this form before filing your taxes.

If you invest in an MLP as part of your IRA or 401(k), you may have to pay unrelated business tax income, or UBTI. This is why experts generally advise against these investments. They also tend to be more volatile than stocks and bonds.

However, you can get the benefits of an MLP by investing through an ETF, which will not generate UBTI, according to ETFTrends.com. Again, it’s a good idea to speak to a financial advisor if you want to diversify your retirement investments in this way.

Passive foreign investment companies

Passive foreign investment companies are foreign companies in which at least 75% of the company’s gross income is passive and/or 50% or more of the company’s assets produce passive income. Passive income includes money earned from dividends, interest, royalties, rent, or capital gains.

U.S. taxpayers who earn income from PFICs face complex reporting requirements, steep penalties for failing to comply, and potentially high tax rates.

Anyone with PFICs with a total value of more than $25,000 ($50,000 for married filing jointly) must file Form 8621 for each PFIC. You will need to choose an election for each PFIC to determine its tax treatment.

Excess Distribution Method: The least favorable excess distribution method in most cases taxes any distribution in excess of 125% of average distributions received over the past three years at your marginal tax rate plus an additional interest charge. This is the default election.

Mark-to-Mark: You can elect to have PFIC gains taxed at your regular income tax rate, whether or not you sold the shares. If the PFIC shows a loss, you can deduct that loss to offset prior gains.

Eligible Election Fund: When you choose the fund election QEF, PFIC shares sold are taxed under the usual capital gains tax rules. However, you can only make this choice if the PFIC provides detailed financial information each year.

Net investment income tax explained

The Net Investment Income Tax was introduced in 2013 to help fund Medicare under the Patient Protection and Affordable Care Act. NIIT seeks to pass on Medicare health care costs to higher-income taxpayers who derive part of their income from investments. This additional tax of 3.8% is added to the normal income tax and the tax on capital gains from the sale of investments.

Under NIIT, taxpayers owe 3.8% of their net investment income or 3.8% of their modified adjusted gross income that exceeds the NIIT threshold based on their filing status. These threshold amounts are:

• Married, filing jointly: $250,000
• Married, separate declaration: $125,000
• Single or head of household: $200,000
• Eligible surviving spouse with one child: $250,000
• Income subject to NIIT

Income subject to NIIT and exclusions:

Rules regarding real estate and passive activity

Investing in real estate as a landlord can generate significant profits. And real estate investors, of course, must report this income to the IRS for tax purposes.

But those who qualify as real estate professionals may be able to deduct expenses associated with rental income. Most investors who rent homes in their spare time do not qualify. Instead, their real estate rentals are considered a “passive activity.”

Passive losses, including all expenses associated with renting a home, including repairs, marketing, tenant screening, and property management fees, cannot be used to offset significant earned income. Passive losses can only offset passive income.

However, you may be able to deduct up to $25,000 in passive losses on your non-passive income if you actively participated in tasks associated with your non-passive income. it rental property, such as approving tenants and making management decisions.

Married couples, filing separately and living with their spouse at any time during the tax year are not eligible for this benefit. It also phases out between $100,000 and $150,000 in MAGI ($50,000 and $75,000 for married taxpayers filing separately).

What Real Estate Professionals Need to Know

Real estate professionals have different rules regarding writing off rental property expenses. But there are strict rules to follow to demonstrate that you qualify. The real estate professional must:

• Devote more than 50% of your working time to material activities related to trades or real estate businesses
• Perform more than 750 hours of service in real estate professions

“If we are faced with an IRS audit scenario for client-facing real estate professional status, the most crucial piece of evidence the client can provide is a contemporaneous time log that links hours to actual real estate tasks performed,” Salas said. “These tasks may be supported by third-party records, such as Google Calendar, emails, invoices, client meetings, mileage or communication with suppliers and subcontractors.”

He noted that the IRS will look for specific dates, tasks associated with real estate, reasonable hours spent on those tasks, and whether those tasks are consistent with actual responsibilities related to rental properties.

“If you can’t view time, dates and tasks without backup records, the position you hold will generally collapse,” he warned. “Most people faced with this problem have to reconstruct their evidence, because it was never done when [the work] was actually played.

Depreciation Recovery for Real Estate

Real estate investors often reduce their tax bill through property depreciation. However, if you sell the asset at a profit, the IRS can recapture the taxable income you wrote off through depreciation.

When you calculate real estate capital gains tax, the recaptured depreciation is taxed at your marginal tax rate, up to a maximum of 25%. The rest of the profits are taxed at the usual long-term capital gains rate (if you held the property for more than a year).

When calculating your adjusted cost basis, be sure to take into account what you paid for the property, plus any improvements, minus depreciation. This is your adjusted cost basis that must be used to calculate your capital gains.

Strategies for Complex Income Management

Understanding your income and expenses can help you prepare for tax time and take proactive steps to reduce your tax bill. Meet with a reliable tax advisor to determine how you can reduce your tax liability.

“There are many ways to structure finances to stay below MAGI thresholds,” Salas said.

S corporations and other pass-through entities can defer income or increase deductions at year-end. Changing your entity type to an S Corp or LLC can also help you save taxes. “Harvesting different tax losses, leveraging donor advised funds and other charitable giving techniques, and planning for installment sales are all ways we can stay below MAGI thresholds,” Salas said.

You can follow these simple steps to prepare your tax records for filing:

• Review K-1 estimates
• Collect tax deficits (at the end of the year)
• Check the base