Robinhood makes it easy for anyone to grab their favorite stocks and sell them with the touch of a button. Many investors have made good money from Robinhood due to the stock market highs and commission-free trading. But don't become so infatuated with making money in the stock market that you turn a blind eye to taxes.
If you're new to Robinhood or need to brush up on the latest tax laws, here's a simple list of goodies to help you create a smart tax strategy as you crush your investing goals this year.
1. Not all investors are required to pay taxes
This can be a huge relief and save you a ton of anxiety. So, before you get too far in the guide you should know that you may be exempt from paying taxes.
Being an investor doesn't automatically mean that you have to pay taxes. You only pay taxes if you earn money in the stock market. Let's say you purchased $1,000 worth of growth stocks last year. If you don't sell any of the stocks in your portfolio, you don't pay any taxes. If you decide to sell shares for a profit, you've just triggered capital gains taxes. We'll talk about that next.
2. You'll pay higher taxes if you sell too soon
Timing matters when it comes to taxes. The magic time frame is one year but it can be very tempting to sell before that time.
Robinhood sends alerts to investors throughout the day to inform them of significant increases or decreases in a stock price. When stocks reach 52-week highs, you can easily sell them within seconds and redeem your profits.
But don't move too fast. You'll be hit with short-term capital gains taxes if you sell stocks that you've owned for a year or less. Those capital gains tax rates can be as high as 37% for the highest income earners. Basically, you'll end up paying the same rates you would pay on income from working a job.
3. Being patient pays off on your tax return
If you've held stocks in your Robinhood account for over a year before you sell, you'll get a sweet deal on your tax return. Meeting the one-year anniversary for your stocks allows you to unlock more favorable long-term capital gains rates. You'll get access to the 0%, 15%, or 20% tax brackets. It's possible to pay no taxes on the money you earn in the stock market if your income is under a certain amount.
4. There's a tax on dividend income
Many investors make money in the stock market from capital gains. Simply put, capital gains are when you buy a stock for one price and sell it at a higher price. But you can also make money when you earn dividends from your investments. It's a great way to add some extra cash to your portfolio without selling your stocks.
There are thousands of dividend-paying stocks to choose from on Robinhood's platform. Many companies will pay dividends every quarter and some will pay dividends monthly. Even if you choose to reinvest your dividend income, it will still be taxable. But you can dodge the high tax rates by adding more qualified dividends to your portfolio.
5. You don't pay taxes on stock losses
The IRS won't require you to pay taxes if you've lost money in the stock market. You only get a tax bill when you earn money.
If you have a mixture of winners and losers in your portfolio, you can take advantage of tax-loss harvesting to reduce your tax bill. All this means is that you'll use your losses to offset your gains in the stock market, giving you the green light to lower your taxes.
6. Selling fractional shares for a profit is a taxable event
Robinhood is very attractive to new and young investors because you can buy fractional shares. Instead of buying a full share of a stock for $1,000, you can get one-tenth of the stock for $100. But if you sell a piece of your share and take home a profit, you'll have to pay taxes on that money earned.
7. You'll get a special form before tax time
If you've earned income from dividends or selling shares of stocks, be on the lookout for a 1099 tax document. Note: You will not receive a 1099 for your dividend income if your proceeds are less than $10.
Robinhood will send you a tax form to show all the money you've earned during the year. It will also send a copy to the IRS. Make sure you add your documents to your portfolio when you file your tax return to ensure you are ready to tackle tax season.