The last years have brought a tidal wave of people to the stock market. This is by no means a coincidence. A lot of that is because the rising popularity of Robinhood made the market much more accessible for ordinary people like you and me. In 2013, Robinhood was released and sent a shockwave through the investment world by being the first broker to not charge any commission on stock trades. You can just take your money and invest it entirely without paying any brokerage fees. The next question many Robinhood users have is: Do you have to report stocks on taxes with Robinhood? There are a lot of common misconceptions out there, so let’s clear all that up.
For many, investing in the Robinhood Platform feels more like a game. But every investor will come to terms eventually with the tax consequences. But you do no need to fear the end of the tax year and the beginning of tax season! You can prepare yourself and know about the tax rules ahead of time. Understanding the basics will help you feel confident about your money.
Do you like Robinhood and want to get the most out of it? Take a look at our other articles about Robinhood:
What Do You Pay Taxes On When Trading Stocks On Robinhood?
The IRS (Internal Revenue Service) isn’t interested in every little detail of your account. They are interested in all transactions you do that cause a taxable event. Knowing what causes these taxable events is key. It’s actually pretty easy if you think about it. Every time you sell a stock, you create a taxable event. You do so when you sell at a loss and a gain. Losses can be used to offset your gains in the tax year.
There are some other situations you should keep in mind. You must also pay taxes if you own a stock, ETF, or Mutual Fund that pays a dividend. You will pay taxes on the entire amount of your dividend income. There are some rules around qualified dividends and non-qualified dividends that you should be aware of.
How To Minimize the Taxes You Pay On Stocks on Robinhood?
You can absolutely influence the amount of taxes you pay on stock sales. You can minimize taxes and have more money in your pocket with simple tricks. This increases your investment income and benefits your tax situation. Instead of trading stocks frequently, simply buy and hold your stocks longer. The IRS rules are designed to encourage you to hold your stocks for at least 1 year. You have an incentive to do that as you will pay a lower tax rate. This is the difference between short-term capital gain and long-term capital gain. Any gain you realize by selling your stock, mutual fund, or exchange-traded fund (ETF) will fall into one of these categories.
If you sell before holding your stock for one year, you’ll have to pay the same taxes as your ordinary income. Look at the table below for how much taxes you pay if your sale falls into the long-term capital gains tax category.
$0 – $44,625
$44,626 – $492,300
Married filing jointly
$0 – $89,250
$89,251 – $553,850
Married filing separately
$0 – $44,625
$44,626 – $276,900
Head of household
$0 – $59,750
$59,751 – $523,050
Long-term capital gains tax rates for the 2023 calendar year
Your taxable income is generally lower than your total income. That’s because there are certain tax deductions you can claim. They will lower the amount of your taxable income and determine the tax bracket you fall into. You should consult with a tax professional to assess your personal situation. Remember that your state can also have a set of tax rules. You might owe additional state taxes on your investment activity.
You also have another very powerful way to save taxes. Instead of an individual brokerage account, you can invest your money in a tax-advantaged individual retirement account (IRA). Robinhood offers a traditional IRA as well as a Roth IRA as part of their service. If you don’t need your invested money any time soon, it might be a good idea to take a closer look at that.
What is the Wash Sale Rule?
You might have heard about a rule called the Wash Sale Rule. This rule states that if you sell an investment at a loss and repurchase it within 30 days, you cannot claim that loss for tax purposes. If you do that, there is no tax penalty, just the tax disadvantage. Remember that this also applies if a family member or a company you own repurchases these investments. So, just wait for 30 days after selling at a loss if you are planning to buy your stocks back.
Can You Decide Which Stocks To Sell With Robinhood?
Robinhood has one disadvantage over some other brokers. It’s easier to see with an example: Imagine buying one share in January of Nvidia for $300 and another in July for $400. In August next year, you want to sell one share at $500. Which one do you actually sell? We already know that the sale creates a taxable event. What you pay taxes on is the capital gain. That’s the difference between your initial price (your cost basis) and what you get from the sale (your sale price). For the first share, it is $200; for the second, it is $100. Robinhood, by default, does not allow you to choose. They will sell the shares you bought first. This strategy is called FIFO and is short for first-in, first-out. In our example, they will create a taxable event and realize a capital gain of $200. Technically, it would have been smarter to sell the second share.
I have already tried contacting Robinhood Support. I would love to change this default behavior and choose on my own. So far, I’ve not been able to do it. I’d be very interested if you have done the same. Maybe you had more luck?
Where To Find Help Preparing My Taxes?
Robinhood will send all your taxable event information to the IRS every year. They also keep track of everything for you and will send you the necessary forms, like form 1099-b, form 1099-div, etc. These forms contain all the important tax information for your Robinhood account. Most tax software supports importing these forms very easily. You can save time and import your entire investment activity with a simple import. You can always check the Robinhood App if you didn’t get your forms. Sometimes, you will not get any forms. This is the case if you didn’t have any sales of stocks, for example. You don’t have to report anything to the IRS in this situation. You’ll not have any tax obligations based on your investment activity.
Do you need to file your taxes and don’t know where to start? You can look at our detailed guide, “How To Pay Your Tax On Robinhood Stocks – Investor Guide.”. This guide covers filing your taxes in great detail. It also covers Robinhood Crypto. This is important if you trade cryptocurrency during the year. You also have to pay taxes on those capital gains by doing so.
Final Thoughts – Do You Have To Report Stocks on Taxes With Robinhood?
Knowing what to expect during tax season will make a real difference. Filing taxes with confidence makes you a better investor. You also signed up to learn more about this topic by investing your money.
In this blog post, you have learned details about reporting stocks on taxes with Robinhood. We discussed the difference between long-term capital gains tax and short-term capital gams tax. You can use these and other tips to lower your tax bill. We also discussed the Wash Sale Rule so you don’t accidentally lose out on claiming your tax losses.
Disclaimer: The information in this blog post should not be considered tax advice or a replacement. They are solely provided for informational purposes. Please consult with a tax professional for any specific questions on your taxes.