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 trip to a tax preparer or DIY tax software is likely insufficient for accurate filing.

Today, more than one-third of Americans earn extra money through side hustles, investment income, real estate or selling stocks or crypto. This complex income demands 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 trouble with the IRS. Filing inaccurately might also mean missing deductions that could lower your tax bill or lead to a refund. 

For example, business owners with pass-through entities who fail to file, assuming they made no money, can face failure-to-file penalties that run into thousands of dollars and continue to accrue, according to Joel Salas at Elevated Tax Strategies and an expert at JustAnswer.com.

“The best [tax] planning isn’t trying to find a loophole; it’s just making sure your basis records are audit-ready,” said Salas. 

In this guide, we break down the 2026 tax filing rules for complex investments — including capital gains, partnerships, real estate incomes, foreign investments and 1099-K income — and provide broad strategies to potentially reduce your tax burden.

While it’s always best to speak to a tax professional who can offer guidance tailored to your finances, if you plan to file your own taxes, we recommend either H&R Block or TurboTax, as both offer professional support for complex filing.

Capital gains reporting nuances

If you sell real estate, stocks, cryptocurrency, and even items like jewelry and collectibles at a profit, you’re 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 earn money on the sale of an investment held for less than one year. The year is counted from the date you buy the asset up to the date you sell it. If you sell an appreciated asset on day 366, it’s 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, the same as your W-2 salary and other earned income. Long-term capital gains are taxed differently, and the rate might be as low as zero.

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

Long-Term Capital Gains Rate	Income	Filing Status
0%	up to $48,350	Single, married filing separately
0%	up to $64,750	Head of household
0%	up to $96,700	Married, filing jointly; Qualified surviving spouse
15%	$48,351 – $533,400	Single
15%	$64,751 – $566,700	Head of household
15%	$48,350 – $300,000	Married, Filing separately
15%	$96,701 – $600,050	Married filing jointly, Qualified surviving spouse

Capital gains tax exception: Collectibles

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

However, make sure to take into account the original price you paid, and any costs, fees or commissions related to the purchase. That’s called the cost basis. The higher your cost basis relative to the selling price, the less tax you’ll pay.

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

If you inherited the item, you can determine the cost basis through the item’s fair market value at the time of inheritance. If you sell the item after a year, your long-term capital gains is the selling price minus the fair market value.

Qualified small business stock exclusion

There’s another exemption when it comes to long-term and short-term capital gains, and this one works in favor of taxpayers.

The Qualified Small Business Stock Exclusion, or QSBS, applies to individuals who sell stock issued directly by an eligible corporation with a tax basis of less than $50 million.

If the company had less than $50 million in assets up to the time the stock was issued, taxpayers can write off up to $10 million or 10 times the original investment, whichever amount is higher, as long as they’ve held the stock five years or longer before selling.

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

Decoding pass-through entities and specialized forms

The Schedule K-1 form shows the income for partnerships, S corporations, estates and trusts. Owners in these pass-through entities can report the income on their personal tax returns and avoid double taxation.

A pass-through entity is one in which the business owner “passes” any profits and losses through to their personal income taxes, rather than paying corporate taxes. 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 Jan. 31 deadline for other tax paperwork, such as W-2 and 1099 forms. Taxpayers can easily misreport their earnings, leading to a larger tax liability. 

“If the K1 shows more income than you expect, whether wrong or just incomplete, you can end up paying tax on money that isn’t even profit, especially when other custodians have reported that basis tracking for you, and it’s incomplete,” Salas said.

Some business owners of pass-through entities believe they don’t have to file or forget to include K-1 income on their tax returns. “I think the single most common costly error is that people forget to file, even if the K1 won’t move the needle,” Salas said.

Tax benefits of Real Estate Investment Trusts

Real Estate Investment Trusts, or REITs, offer tax advantages to investors and to the investment company that holds them. An REIT must pay at least 90% of its taxable income as dividends, thereby 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, or QBI, deduction, whether or not they itemize or take the standard deduction. Dividend income from the REIT after the first 20% is taxed at the person’s regular tax rate.

However, investors may also reduce their dividend income using the Return on Capital, or ROC, rule. If an REIT dividend also includes a portion of operating profit previously sheltered due to depreciation, that portion isn’t taxable. But using the ROC to reduce taxable income also lowers your cost basis for that REIT, which could result in higher capital gains when you sell.  

Master Limited Partnerships

A Master Limited Partnership, or MLP is a type of pass-through entity in which investors (known as 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’s important to wait for this form before you file 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. That’s why experts typically recommend against these investments. They also tend to be more volatile than stocks and bonds.

However, you can gain the advantages of an MLP by investing through an ETF, which won’t generate UBTI, according to ETFTrends.com. Again, it’s smart to speak with a financial advisor if you want to diversify your retirement investments this way.

Passive Foreign Investment Companies

Passive Foreign Investment Companies are foreign corporations where 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 from dividends, interest, royalties, rent or capital gains.

US taxpayers who earn income from PFICs face complicated filing requirements, stiff penalties if they don’t meet them, and potentially high tax rates.

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

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

Mark-to-market: You can choose for gains in the PFIC to be taxed at your regular income tax rate, whether or not you sold the shares. If the PFIC is showing a loss, you can deduct that loss to offset prior gains

Qualified electing fund: When you choose the QEF election, PFIC shares sold are taxed in accordance with regular capital gains tax rules. However, you can only choose this election if the PFIC provides detailed financial information annually.

The 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. The NIIT seeks to pass Medicare health care costs onto higher-income taxpayers who derive a portion of their income from investments. This additional tax of 3.8% is in addition to the standard income tax and capital gains tax from the sale of investments.

Under the 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, filing separately: $125,000
• Single or Head of Household: $200,000
• Qualifying Surviving Spouse with a Child: $250,000
• Income subject to NIIT

Income subject to NIIT and exclusions:

Included	Not Included
Interest	Wages
Dividends	Unemployment compensation
Capital gains	Social Security benefits
Rental income	Alimony
Royalties	Self-employed income
Nonqualified annuities	Gains on the sale of a primary residence that is also not subject to income tax

Real estate and passive activity rules

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

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

Passive losses, including any expenses associated with a home rental, including repairs, marketing, vetting tenants, and property management costs, can’t be used to offset material earned income. Passive losses can only offset passive income.

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

Couples who are married, filing separately and lived with their spouse at any time during the tax year don’t qualify for this allowance. 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 governing write-offs for expenses related to rental properties. But there are strict rules to follow to show you qualify. The real estate professional must:

• Spend more than 50% of their business time in material activities related to real property trades or businesses
• Perform more than 750 hours of services in real property trades

“If we face 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 ties hours to actual real estate tasks performed,” Salas said. “These tasks can be backed by third-party records, such as Google Calendar, emails, invoices, meetings with clients, mileage or communication with vendors and contractors.”

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

“If you can’t show time, dates, and tasks without backup records, usually the position that you’re taking is going to collapse,” he warned. “Most of the folks going through this issue have to rebuild their evidence, since it was never done when [the work] was actually performed.”

Depreciation recapture 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 may recapture the taxable income you wrote off through depreciation.

When you calculate capital gains tax on the property, the recaptured depreciation is taxed at your marginal tax rate, up to a maximum of 25%. The rest of the profit is taxed at the regular long-term capital gains rate (if you held the property longer than a year).

When you calculate your adjusted cost basis, make sure to take into account what you paid for the property, plus any improvements, minus depreciation. That’s your adjusted cost basis that should be used to calculate your capital gains.

Strategies for complex income management

Understanding your income and expenses can help you be prepared 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 under MAGI thresholds,” Salas said.

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

You can take these simple steps to get your tax records ready for filing:

• Review K-1 estimates
• Execute tax-loss harvesting (at the end of the year)
• Verify basis