Offering free trades with no minimum account balance, Robinhood has become a popular investment site for those who wish to dabble in stocks and cryptocurrency. Unfortunately, the IRS does not adhere to the same free fee structure as the platform. You may be able to execute trades for free on Robinhood, but the IRS will still expect you to pay taxes on selling stocks.
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Offering free trades with no minimum account balance, Robinhood has become a popular investment site for those who wish to dabble in stocks and cryptocurrency. Unfortunately, the IRS does not adhere to the same free fee structure as the platform. You may be able to execute trades for free on Robinhood, but the IRS will still expect you to pay taxes on selling stocks.
How Are Stocks Taxed on Robinhood?
IRS Publication 550 explains the rules in much greater detail, but investments managed through Robinhood get taxed the same way as other investments. Dividends are still divided into qualified and ordinary dividends, with qualified dividends being taxed at a lower rate. Stocks, too, are taxed normally.
As always, you won’t have to pay tax on a stock simply because its value increased. You will, however, need to pay tax on any profits you make when you sell stock. Stocks held less than one year are subject to the short term capital gains tax rate, which is the same tax rate you pay on your ordinary income. Stocks held longer than a year get taxed at the more favorable long term capital gains rates of 0, 15 or 20 percent, depending n your income level.
As usual, you are free to report a capital loss as well as gains on your tax return. Remember the wash sale rule when doing so, however. If you sell a stock at a loss but then buy an identical or very similar stock within 30 days, you have participated in a wash sale and cannot claim the loss on your tax return. The same is true if you buy the same stock 30 days before you sell it. The prevents taxpayers from intentionally racking up losses as a tax-reduction strategy.
Note, too that sometimes Robinhood gives account holders free stock. You may get a free stock for joining the site or for referring a friend. If those stocks exceed $600 in value, both you and Robinhood must report the money to the IRS as income.
Important Robinhood Tax Documents
Robinhood offers very little customer support, but you can count on them to provide you with important tax documents at the end of the year. You’ll likely receive only one statement, but it will include multiple tax documents as necessary. One is the 1099-DIV. This form reports your dividend income and details any dividend payments you received throughout the tax year. You may not receive this form if your dividends total less than $10 for the year.
Your documents may also include a 1099-INT. This form reports any interest you receive and, like the 1099-DIV, won’t be issued to you if your interest was less than $10. Expect a Form 1099-B as well. This form tallies all of the gains and losses from your brokerage transactions. If you sold any stock during the year, you will get a 1099-B. You may also get a Form 1099-MISC to report any other miscellaneous income.
Be aware that Robinhood may provide these forms electronically rather than through the mail. To find them, log into your account and then click “Account – Statements & History – Tax Documents.” If you’re not getting any tax documents this year, Robinhood will tell you that so you don’t wait on forms that aren’t coming to file your taxes.
When you do see your tax forms, you may notice that the information reported on them doesn’t match your current Robinhood account balance. This is perfectly normal and not cause for alarm. Your 1099 forms report your income and losses from stock sales only. It does not keep a running balance of any deposits or withdrawals that you make. Your stock proceeds and your current account balance need not match each other and probably won’t. If, however, you do find a mistake on your 1099 document, you’ll need to reach out to Robinhood and ask for a corrected one.
Paying Taxes on Robinhood Stocks
If you’ve been investing for a long time, you probably already know how and where to report your Robinhood income. If you’re dipping your toe in the investment waters for the first time, however, there are a few basics you should know. When filing a Form 1040, interest and dividend income gets reported on a Schedule B. The directors for this form will tell you how to complete it and where to report your final numbers on your 1040.
Stocks and cryptocurrencies that you sell through Robinhood get reported on the Form 1040 Schedule D. Depending on how many trades you make during the year, your Schedule D could become quite long. You can make your life much easier at tax time if you work with a CPA or a tax software provider that allows you to upload any Forms 1099 you receive. Robinhood specifically works with Turbo Tax to make uploading your tax information easy, but you may be able to use other tax software as well.
Robinhood Crypto Taxes Explained
Cryptocurrency is a relatively new development, and as such the IRS rules about it could change at any time. For now, however, the IRS is treating crypto as property rather than cash. That means it’s taxed in much the same way as stock.
There are no tax consequences when you purchase crypto or transfer it between online wallets established in your name. You must, however, pay income tax on any profits you make when you sell your crypto. As is true with stock, both short- and long-term capital gains tax rates apply based on how long you held the currency.
Although buying cryptocurrency isn’t a taxable event, getting it for nothing may be. If you are gifted cryptocurrency, you could have to count it as income and pay tax on it.
You must also report a gain, if applicable, when you buy something using crypto. Let’s say, for example, that you bought some crypto valued at $25. You’ve held onto it for a while and its value has gone up. As such you were able to use your $25 worth of crypto to buy a $35 item online. As far as the IRS s concerned, you just realized a $10 gain n your crypto and you must pay tax on it.
Fortunately, the opposite is also true. If you used your $25 to buy a $20 item, you recognize a loss of $5. You can use this loss to offset other gains.
What’s a B-Notice?
Because they’re required to report information about your account activities to the IRS, Robinhood should have asked you to provide them with a Form W-9 when you opened your account. This form reports your name and address as well as your social security number or other taxpayer identification number. Once a year, the IRS checks this information to make sure it matches the information they have on file for you.
If it doesn’t, the IRS will send you a B-notice. If you get one, you can resolve the issue simply by submitting a corrected (or initial if you haven’t already filed) Form W-9. Until you do, however, Robinhood will let you keep the stocks you have or sell them, but you won’t be allowed to purchase any more stock until your information is updated.
Need Professional Advice?
The Robinhood platform has done a good job of making basic investing easily accessible, but its sole purpose is to facilitate trades. Making sure that the tax consequences of the trades you make there are understood and followed is not one of the services they provide. Fortunately, Picnic Tax does. We are willing and able to offer the help and tax advice that Robinhood can’t. Let us put you in touch with one of our knowledgeable CPAs today and we’ll help you stay on the good side of the IRS.
