Paying taxes on capital gains is a requirement every year, and paying Robinhood taxes is no exception. Robinhood is one of several investment apps that takes the guesswork out of investing. Often referred to as robo-investing or robo-advisor, these popular apps ask investors several questions about their risk level and create a unique portfolio for long-term investing.
Like many other robo-investing apps, Robinhood offers several investment options — including retirement accounts for long-term investing — as well as short-term capital options. Investors must be aware that they will owe taxes on any capital gains, plus understand how that may impact their legacy wealth.
Here is your guide to help you understand when and how to pay taxes on your investments, especially those made through apps like Robinhood.
What is the Robinhood App?
Robinhood and other robo-investing apps generally offer a free platform to users to trade different types of securities. These include:
- Stocks
- Options
- Exchange-traded funds (ETF)
- Sometimes cryptocurrency
The biggest benefit to users of these robo-investing apps is that they do not pay a commission on trades. These apps are thus popular with day traders looking for short-term capital gains. Larger investment banks may charge a commission for each trade which can severely diminish any gain. Offering free trades attracts many users.
Generating Income Through Investment Apps
When you open an account with Robinhood, you first have to fund your account before you can start trading. This can take up to a few days so you may not be able to start trading stocks right away. After that, there are a few facts you need to know:
- Generating income through Robinhood is similar to other types of investing.
- You choose an equity, make a purchase at a certain price, and hope that price increases.
- Over time, you could have long term capital gains on that stock.
- Other investors look for short term capital gains by trading lots of equities in one day and doing so very quickly.
These traders may buy thousands of shares but only hold them for minutes. This can be a dangerous proposition for inexperienced traders as you risk losing all of your investment if you are not strategic.
How to Pay Taxes on Robinhood Stocks
Every investor wants to make money. Whether you are a day trader or looking for a long term capital gain, your goal is to increase the value of your investment. When that happens, you must pay taxes. Robinhood investments are no exception. Here are a few important steps to follow to make sure you’re paying the right amount:
1. Determine Your Taxes
First of all, you will not owe any tax if you have not sold a stock. If your investment increases in value but you did not sell it, you have not yet realized that value so you will not owe any taxes. When you do sell a stock, you will pay taxes but short term and long term holdings are taxed differently.
Short term gains, those securities held for less than one year, are taxed at the same rate as your income. Long term gains, those securities held for more than one year, are taxed at either 0%, 15%, or 20%, depending on your income tax rate.
2. Collect Tax Documents
Any time you have a capital gain from the sale of a stock or cryptocurrency, Robinhood will compile that information for you and provide you with an end of year tax document, called a Form 1099.
This form must be provided to you no later than February 16, and you can find it in the Robinhood app. You do not have to wait for a paper form 1099 to be mailed to you.
3. Pay Your Taxes
When you sell a stock during a calendar year and that stock increased in value from the time you purchased it, you will owe taxes on the increase. An exception is if the value increased by less than $10, then you will owe nothing.
Robinhood also allows users to trade cryptocurrency. The Internal Revenue Service (IRS) considers cryptocurrency property for tax purposes. So if you see gains on your cryptocurrency holdings, you will owe taxes but it may be taxed differently than your other investments. This can create confusion during tax season.
If you receive a Form 1099 from Robinhood, that means you will owe taxes. As you prepare your personal income tax return, there will be lines for you to add capital gain and dividend amounts. If you do not pay the correct amount, you risk fines and penalties from the IRS for failing to accurately file and pay your taxes.
Downsides to the App-Based Investment Taxes Process
The allure of commission-free trades is appealing as you can maximize your investment returns by not paying commissions. Getting something for free can have disadvantages, however, including:
- When you have a capital gain, you will owe taxes on the increase in value.
- You can use tax-loss harvesting to help lower your tax burden by selling other securities which may have decreased in value, though.
- To do that well, you need to choose which tax lot to sell when placing a trade, something Robinhood does not allow users to do.
It is also worth stressing again that you must be accurate when filing your taxes. Not only does Robinhood send tax documents to you, they also send them to the IRS — so you must properly report your profits.
Speak with a Tax Advisor about Reporting Robinhood Taxes
Any investment can create confusion during tax season. Robinhood can further increase users’ confusion about when and how to file taxes because of the ease of use of their service and their focus on short term versus long term gains.
Because of this, you need to partner with an experienced and trusted tax advisor to make sure you are properly reporting your taxes. Making mistakes, even unintentionally, can send the wrath of the IRS your way. Your best chance of avoiding costly fines and penalties is to partner with a trusted tax advisor to guide you through the complexities you face.
Contact Silver Tax Group today to speak with a knowledgeable tax advisor about your Robinhood tax questions.
