IRS Publication 550: Overview and Key Points

What it is

IRS Publication 550, “Investment Income and Expenses,” explains how various forms of investment income and investment-related expenses are taxed and reported on individual tax returns. It guides taxpayers on what income is taxable, which expenses are deductible (and any limits), and how to determine and report gains and losses from investment property.

Who should use it

• Individual investors (including shareholders of mutual funds and other regulated investment companies)
• Taxpayers with interest, dividend, capital gain, or other investment income
• U.S. persons with foreign investments or transactions involving foreign persons
• Anyone needing guidance on reporting the sale or disposition of investment property

Main topics covered

• Types of taxable investment income:
• Interest (including money market funds, CDs, U.S. obligations, foreign interest, original issue discount, and related special situations)
• Dividends (ordinary and qualified dividends) and capital gain distributions from mutual funds and REITs
• Capital gains and losses on the sale or other disposition of investment property
• Investment expenses:
• Which investment-related expenses are deductible and how to report them (including treatment and limitations)
• Reporting guidance:
• Where and how to report different types of investment income and losses on individual tax returns
• Tables that map types of investment income to the appropriate tax forms and lines
• Special topics:
• Treatment of property trades and tax shelters
• Specific rules for complex situations (e.g., below-market loans, interest on certain contracts, and bonds sold between interest dates)

Related IRS publications

• Publication 515 — Withholding of Tax on Nonresident Aliens and Foreign Entities (rules for withholding when U.S. property is purchased from foreign persons)
• Publication 525 — Taxable and Nontaxable Income (includes special rules for employee stock options and other compensation-related items)

How to use Publication 550

1. Identify the type of investment income or expense you have (interest, dividend, capital gain, etc.).
2. Consult the publication’s sections and tables to determine whether the income is taxable and whether any expense is deductible.
3. Follow the reporting instructions to locate the proper lines and schedules on your federal tax return.
4. For cross-cutting issues (foreign investment income, stock options, withholding), consult the related publications noted above.

Key takeaways

• Publication 550 is the primary IRS guidance for tax treatment and reporting of most investment income and related expenses.
• It clarifies distinctions such as ordinary vs. qualified dividends and explains how capital gain distributions are taxed.
• Use it to determine deductibility and proper reporting of interest, dividends, and gains/losses; consult related IRS publications for specialized issues.

Where to find it

Publication 550 is available from the Internal Revenue Service website.