Like any other financial technology company, Robinhood reports certain income information of its account holders to the IRS to ensure tax transparency. Depending on the total number of transactions and the total income earned during the tax year, Robinhood issues several tax forms like Form 1099-B and 1099-D to assist their clients in accurately reporting their annual tax returns. A copy of the applicable tax form is also sent to the IRS.
What Are the Tax Implications of Using Robinhood?
Both state and federal taxes may apply for using the Robinhood platform for trading or investments. Taxable transactions include income from capital gains, dividends, cryptocurrency trading, day trading, and interest income earned from uninvested cash on their platform.
Because the IRS also receives a copy of the tax form, any discrepancy between what you report, and the information furnished to the IRS can trigger a tax audit or even legal repercussions. Therefore, staying vigilant about tax compliance and proactively addressing any tax issues is important.
Understanding Form 1099 from Robinhood
1. What Is Form 1099?
It’s an income reporting tax form. The form will reflect the amount you earned throughout the year through trading, dividends, interest, etc. It will also show any realized losses that violated the IRS sales (wash sale). Robinhood will provide you with the necessary 1099 form to file your taxes.
2. How to Read Your Form 1099 from Robinhood
To know whether the information mentioned on Form 1099 is accurate, you should be able to read it properly.
Recognize the tax form
Robinhood issues various tax forms, including Form 1099-B, which outlines information related to capital gains and transaction losses. The Form 1099-D summarizes earnings from dividends and investments, and Form 1099-INT includes income generated from uninvested cash in your Robinhood account.
Verify your personal information
On the top, your personal information will be mentioned. Check if your name, account number, address, and tax identification number are accurately mentioned on the tax form received by you.
Verify the transactions
In the main body of the form, you will see all the transactions. You can review all the sales proceeds, income, losses, dividends earned, capital gains, and interest income there. Compare everything with your own records to verify the accuracy of the information.
Inspect the form for additional codes
You must look for additional codes or information accompanying the transaction details (if any). These additional codes will provide more information regarding the tax reporting of the particular transaction.
3. What If You Don’t Receive a Form 1099 from Robinhood?
To receive Form 1099, you must make at least $10 in gross proceeds from their platform. Furthermore, for stocks or assets valued under $600, Robinhood is not obligated by the law to send Form 1099.
4. How to File Your Taxes with a Form 1099 from Robinhood
You will gather all the tax documents, including Form 1099, and report all your income at the time of tax filing. Based on your personal preference, you can mail the return or file it electronically.
To help identify potential deductions, tax returns, etc., that you need clarification on, seek help from a tax professional who can help you with complicated tax issues.
Do You Have to Pay Taxes on Robinhood Investments?
1. Short-Term Capital Gains Tax
When an investment is sold within the first year of obtaining it, it’s classified as a short-term capital gain. Any capital gain from the sale of assets of this nature is usually taxable.
Depending on the income slab, the taxes can range between 0 to 37%. If the total taxable income is up to $11,000, no taxes will be levied on short-term capital gains. Beyond $11,000, taxes are applicable.
2. Long-Term Capital Gains Tax
If the asset is held for over a year and sold later, it’s classified as a long-term capital gain. Long-term capital gains are taxable, but the tax rates are lower than short-term capital gains.
That said, the taxes can range between 0 to 20% depending on the income slab. If the total taxable income is at most $44,625, no taxes will be levied on long-term capital gains. Beyond $44,625, taxes are applicable.
3. Dividend Income Tax
Dividend income earned through the Robinhood platform is taxable. That said, qualified dividends are taxed lower than ordinary dividends. To qualify for lower tax rates, you must have held the stock for 60+ days within the 121 days beginning prior to the ex-dividend date.
4. Interest Income Tax
Interest income is taxable at regular income tax rates. The tax rate for interest income would depend on the taxpayer’s income slab and filing status.
5. Cryptocurrency and Taxes on Robinhood
Cryptocurrency transactions have tax implications. This is to say the capital gains or losses made from cryptocurrency transactions are subject to taxes. Short-term capital gains from cryptocurrency transactions are taxed at regular tax rates. Long-term capital gains are lower, though.
How Can You Minimize Your Tax Liability on Robinhood?
Focus on Long-term Investment
As hinted earlier, capital gains from long-term investments carry lower tax rates. So, focus on holding your investments for more than a year.
Explore all the Tax Deductions
Take advantage of all the possible tax credits and deductions that can be applied to your taxable income to reduce the overall tax liability. If you are unfamiliar with all the available tax deductions, get help from a tax expert.
Deduct Losses
The IRS lets you deduct losses from the overall taxable income. This helps offset some of your taxes, providing relief from the investments that didn’t do well for you.
Maximize Tax-advantageous Contributions
Try contributing more towards tax-advantageous accounts like IRAs and 401(k)s because both provide unique tax benefits. If certain conditions are met, the earnings and withdrawals will be tax-free.
Gifts
You can also consider using the gift tax allowance to your benefit. You can give up to $15,000 (30,000 if married) to a family member each year. Gifting an asset to a family member in a lower tax bracket can reduce the family’s overall tax liability, especially on capital gains.
What Happens If You Don’t Report Your Earnings from Robinhood to the IRS?
The IRS can impose fines, penalties, and other monetary charges for underreporting or not reporting the taxes. Additionally, tax noncompliance can impact your credit score and cause legal complications. Liens can also be placed on your personal property to cover the tax liability. In the worst-case scenario, one risks imprisonment as well.
Can You Get Audited Because of Your Activity on Robinhood?
Activities on the Robinhood platform can trigger an IRS audit. This usually happens when you don’t report your income properly by claiming unnecessary or significant deductions. Excessive trading in stocks or cryptocurrencies can raise red flags as well. Significant short-term capital gains or large cash transactions related to trading can also catch the attention of the IRS.