Published on: January 27, 2021 Last modified: June 22, 2021

How to Pay Taxes on Your Robinhood Stocks

Table of Contents
    Add a header to begin generating the table of contents

    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.

    stock prices and robinhood taxes

    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:

    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.

    income through investment apps

    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:
    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.
    capital gains tax one type of taxes

    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.

    irs notice of deficiency

    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:

    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.

    preparing for irs office audit

    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.

    Share The Knowledge! 😊

    Share on linkedin
    LinkedIn
    Share on twitter
    Twitter
    Share on facebook
    Facebook
    Share on reddit
    Reddit
    Share on whatsapp
    WhatsApp
    Share on email
    Email
    Share on print
    Print

    Get More Knowledge

    Ready to secure your financial future? Subscribe Today For Tax Knowledge Tomorrow

    JOIN 2,000+ OTHERS. YES, IT’S COMPLETELY FREE. ZERO SPAM, UNSUBSCRIBE AT ANY TIME.

    Search Our Tax Knowledge Base

    Search
    Generic filters
    How Can we help?

    Don’t worry, our consultations are 100% Confidential & 100% Free