Robinhood is a popular brokerage firm that many investors use to buy or sell stocks, cryptocurrency, and more. If you're one of the millions investing using the Robinhood app, you need to understand the tax rules that could apply to you.
It can be complicated to figure out the rules for taxes on Robinhood stocks and other assets because how you are taxed depends on the assets involved. It also depends on other factors, such as how long you own a particular asset.
This guide to taxes on Robinhood stocks and other assets will help you better understand your IRS obligations.
How do taxes work on Robinhood stocks?
Stocks are considered a capital asset by the IRS. As a result, if you sell a stock and make money by doing so, you will typically owe capital gains taxes on your profits.
The amount you owe will depend on your basis, which is usually the original price you paid to purchase the stock shares.
For example, if you bought a stock for $1 a share and sold it for $5 a share, your basis would be $1, and you would have $4 in profits you owe taxes on.
The income from a stock sale is taxed differently from income earned at your job. It is subject to capital gains taxes, and there are different tax rates for capital gains taxes depending on whether you have a long-term gain or a short-term gain.
If you own the stock for at least a year and a day before selling, you are subject to long-term capital gains taxes.
Long-term capital gains are taxed at a lower rate than your ordinary income tax rate, which has tax brackets based on your income.
In fact, many people have a 0% capital gains tax rate if their income is below $41,675 as a single tax filer in 2022 or if their income is below $83,350 as a joint tax filer during the same year.
The highest capital gains tax rate is actually 20%, and this applies only to people with an income above $459,750 as a single tax filer, or $517,200 as a married joint filer.
However, if you do not own the stock for over a year, you could be subject to short-term capital gains taxes. These are taxed at your ordinary rate, which can be much higher.
You also have the option to offset capital gains, which means potentially reducing your taxable gains by claiming losses.
For example, if you have $500 in gains and then you sell assets you lost $500 on, you could offset your gains and may not owe tax on any of your profits. Many investors practice tax-loss harvesting, which means strategically timing the sale of losing assets to avoid paying taxes on assets that saw gains.
You cannot, however, sell an investment at a loss to claim the capital loss and then replace it with either the same or a substantially identical investment within 30 days. For example, if you were down $500 on shares of company ABC and sold the shares but then bought them back two days later, you could not write off that investment loss.
How do taxes work on Robinhood cryptocurrency?
If you’re buying a cryptocurrency such as bitcoin through the Robinhood platform, it's important to understand how the taxes will work on it.
Cryptocurrency is treated as a form of digital property and is taxed just as many other capital assets would be. As a result, you will pay either long-term or short-term capital gains taxes if you sell cryptocurrency at a profit.
Whether you are taxed at the reduced long-term rate or at the higher short-term capital gains tax rate will depend on whether you owned the crypto for more than a year or not.
If you convert one cryptocurrency into another, you technically sold the original coins before buying the new ones. As a result, this is considered a sale and you will either be subject to short-term or long-term capital gains crypto taxes based on your length of ownership.
If you sell cryptocurrency at a loss, you may be able to claim a capital loss and deduct the amount lost from any profits that would ordinarily be considered taxable.
Robinhood tax documents
Robinhood will send you some tax documents each year to help you report your earnings from your investments. You may receive:
- A 1099 form from Robinhood Securities if you had any taxable events related to stocks, mutual funds, ETFs, or options. This could include interest income, dividend payments. sales of stocks, mutual funds, or options, or miscellaneous income.
- A Robinhood Crypto 1099 IRS form if you either sold cryptocurrencies or if you received miscellaneous income from Robinhood Crypto over the course of the year.
- An amended 1099 form from Robinhood Securities or Robinhood Crypto if any errors were made on your initial forms.
Many of the best brokerage accounts provide online access to tax documents. Robinhood offers this access, and your 1099 will typically be ready to view by the middle of February, so you have plenty of time to provide the information to your tax professional or enter it into any tax software you are using.
It's also possible to upload your 1099 form from Robinhood directly into TurboTax. TurboTax will ask you your bank name. After you enter it, and your account number, you can import a consolidated 1099 form directly from Robinhood.
Filing taxes on Robinhood assets
Taxpayers typically report investment income on their 1040 tax forms, just as any other income would be reported. The specific place where you report your income depends on the type of investment income you have earned. For example:
- A capital gains distribution would be reported on Line 7 on Form 1040. In some cases, it would need to be reported on Schedule D, line 13. Schedule D is a separate tax form used to report specific transactions to the IRS, such as the sale of capital assets that aren't otherwise reported on other tax forms.
- Gains or losses from the sales of stocks or bonds would be reported on Line 7 on Form 1040. You can calculate gains and losses on Form 8949, Schedule D, which allows you to provide a description of the property, the date acquired and sold, the proceeds, the cost or basis, any adjustments to the gain or loss, and the amount of the gain or loss.
- If you received, sold, or disposed of cryptocurrency, you must check Yes to a question asking about cryptocurrency activities on your 1040 form. You can use Form 8949 to determine your gains and losses and report them on Schedule D of Form 1040.
The best tax software makes it easy to report your investment income and calculate any required taxes due. However, working with an accountant or other tax professional could be helpful if you aren't sure of what forms to use or if you have a complicated situation where you sold many investments over the course of the year.
How does paying taxes work with Robinhood?
When you sell assets you bought with your Robinhood account at a profit, you will likely be taxed on the money you made. This is true of cryptocurrency, stocks, mutual funds, exchange-traded funds (ETFs), and other assets.
You will need to report the income earned each tax year on your tax form and pay capital gains taxes. If you owned the assets for less than a year before selling, you may be taxed at the short-term capital gains tax rate. This is your ordinary income tax rate.
If you owned the assets for more than a year, you may be taxed at the more favorable long-term capital gains tax rate. This could be as low as 0%.
How much do you pay in taxes on Robinhood stocks?
The amount of taxes you will pay on Robinhood stocks depends on whether you make a profit. You pay taxes only if you sell a stock for more than you paid for it. If you sell a stock for a profit within a year or less of buying it, you are taxed at the short-term capital gains tax rate.
If you owned the stock for longer, the more favorable long-term capital gains tax rate typically applies and is between 0% and 20% depending on income.
If you have made a profit, you could offset the profit and potentially lower your tax bill by selling losing investments and claiming capital losses. This is called tax-loss harvesting.
However, if you sell an asset at a loss and buy the same asset or one that is too similar within 30 days, a rule called the wash sale rule typically prevents you from claiming losses.
What happens if you don’t file taxes on Robinhood stocks?
You are required to report all income, including profits from the sale of Robinhood stocks, on your tax return. If you fail to report your income, you could face consequences, including tax penalties.
Robinhood reports your investment income to the IRS, so the IRS will find out if you sell stocks for a profit and don't declare the proceeds.
If you are investing money on Robinhood, you need to know how taxes work. If you sell stocks or cryptocurrency at a profit, you should report the proceeds and pay the taxes owed to the IRS.
Robinhood provides tax forms that help, and you should consider talking with a tax professional, such as a CPA, if you don't know the rules for how investments are taxed or what you need to do to fulfill your obligations to the IRS.
You can also learn more about the platform in our Robinhood review.
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