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Are You a Robinhood Trader? Here’s What You Should Know About Taxes

April 22, 2021
Weisberg Kainen Mark, PL

Take a global pandemic that forces millions of millennials to stay home with nothing but the internet and boredom to guide their behavior, and you get situations like the recent snafu with Robinhood and GameStop. Whatever your position on Robinhood’s decision to limit trading of certain securities and the ensuing outcry, the reality is that hundreds of thousands of U.S. taxpayers will need to get acquainted with Form 1099 and reporting capital gains. 

What is Robinhood? 

Robinhood, established in 2015, was one of the first online applications to offer free stock trading to users, with no commissions or brokerage fees. Robinhood users may also trade cryptocurrency. Only taxable investment accounts are offered on the app; individual retirement accounts (IRAs) and other tax-deferred accounts do not apply. 

Does the IRS Care About Your Robinhood Transactions? 

In short, yes. Any dividends you receive from your Robinhood stocks, or profits you make from selling stocks on the app, will need to be reported on your individual income tax return. If you make a profit from the sale of securities, the tax rate will depend on how long you held the stock. 

  • If you held the shares for a year or more, you will enjoy the long-term capital gains tax rate. Individuals making up to $40,000 per year pay nothing on long-term capital gains. 
  • Stocks (and other assets) that are sold after less than a year are subject to the short-term capital gains tax rate. This is the rate identical to your income taxes. 

Remember: you only need to report capital gains or losses when you sell. If you realize a net capital loss, you can deduct it from your taxable income (up to $3,000). 

Form 1099

If you did not start trading on Robinhood until 2021, you might not receive a Form 1099 before filing your tax return for 2020. However, in mid-February of next year, you should get a consolidated Form 1099 from Robinhood if your capital gains or losses exceeded $10. This IRS document is where you report your profit from Robinhood transactions. Form 1099 is not unique to Robinhood; almost any time you receive income from sources other than your employer, you will receive a Form 1099. Just because you received a Form 1099, though, does not automatically mean that you will be taxed on that income. 

Conclusion

Robinhood and other investing apps have made participating in the stock market more accessible than ever before. If you dabbled in stocks for the first time in 2020 or 2021, we applaud your curiosity and initiative. When it’s time to pay Uncle Sam, though, we recommend seeing a tax professional who is able to scrutinize your financial activities and satisfy your state and federal tax obligations. 

If anything goes awry and the IRS develops an interest in your income and capital gains reporting, Weisberg Kainen Mark stands ready to represent you. Our team is passionate about settling complex tax disputes for our clients. We look forward to discussing your options with you soon.

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Weisberg Kainen Mark, PL

As experienced trial lawyers with a passion for justice, our firm provides clients with compelling advocacy, attorney availability, and creative solutions to your tax or criminal law matters.

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