Does Robinhood Take Out Taxes?

Does Robinhood Take Out Taxes?

*This post may contain affiliate links. As an Amazon Associate we earn from qualifying purchases.

Robinhood is an app that allows investors of any skill level to invest commission-free. They also offer resources for investors so you can learn about different investment options and become a better investor. 

But when you trade with Robinhood, do they take out taxes?

Robinhood does not take out taxes on your investments, but you are still required to pay them in certain situations, like when you sell a security, when you earn dividends, and when you sell cryptocurrency. 

The app will provide you with tax documents so you can pay taxes on your investments when you file your taxes. 

This article will explain what types of investments require you to pay taxes and how taxing works when you invest with Robinhood. I’ll also provide you with some resources that will teach you more about how to invest with Robinhood and choose the best stocks for your investment portfolio.

Certain Investments Require You To Pay Taxes

You need to understand when you are required to pay taxes on your investments. If you are holding a stock or other security for the long-term, you will not have to pay taxes on it until you sell it. 

For example, if you purchase a stock on January 1st and hold that stock for the entire year but haven’t sold it yet no taxes are due. Taxes are only due (as of now) when you sell an asset. 

However, if dividends are paid on the stock, you will have to pay taxes on the dividends you earned. These dividends are taxable, just like any other income you have, no matter what you do with the money, even if you reinvest it.

So, what if you don’t hold your stock or other security and sell it during the year? 

You will have to pay taxes on the money you earn from the sale. The government has two different tax rates for the sale of investments, and your rate depends on how long you hold the investment before selling it.

Gains on a short term investment are charged at your standard tax rate, which is the same tax rate that you are charged on all income you earn during the year. But, if you hold your investment for the long-term, which is for a year or more, you will pay a lower tax rate (called long term capital gains tax). 

You can also lower your taxes if you have losses, as the two can offset. You can claim up to three thousand dollars in losses to reduce your taxable income. For example, you have five thousand dollars in gains and three thousand dollars in losses on your stock sales in one year. Your taxable income on your capital gains would be on two thousand dollars.

Understanding Robinhood’s Tax Policy

Robinhood does not automatically take out taxes on your investments and transactions. Instead, they will send you tax documents that outline how much money you earned on your investments over the course of the year. 

You will have to report the information from these documents on your tax return each year and pay the taxes to the government.

You will not receive tax documents from Robinhood if you made less than ten dollars in dividends, didn’t sell any stock, and didn’t sell more than ten dollars in cryptocurrency. 

However, if you did any of three things mentioned above (that is, made over $10 in dividends, sold stock, or sold more than $10 in cryptocurrency), Robinhood will provide you with your tax documents by mid-February to file your taxes.

If you sold both cryptocurrency and dividends, stock, or other securities, you will receive two separate tax documents from Robinhood for the two different types of transactions. You will still have to report and pay taxes on both forms – they are just reported separately. 

You may be asking why Robinhood does not automatically withhold taxes on your applicable investments and sales, similar to what a job would do with your paycheck. It is mainly because it is difficult for them to calculate these taxes on their end. 

Robinhood does not know your total income, what other investments you make on other trading platforms, and what types of losses and other offsets you report on your taxes.

These factors will affect how much you pay in taxes, not only on your investments but also in general, so the process is more convenient if they do not take out taxes. This also prevents them from miscalculating and taking out too much money as taxes, which can affect your profits.

Another reason is that the app is meant to be easy to use, especially for beginners. If Robinhood starts asking beginners to think about taxes before they’ve even begun trading, it could deter many of their users. 

Learn More About Robinhood

If you want to trade on Robinhood successfully, you need to understand how the app works and find the best stocks for you to trade. The books and videos in this section will help you get started trading with Robinhood.

This YouTube video from TruFinancials will help you understand how to find your tax information on Robinhood so you can prepare your taxes:

If you prefer academic learning, I recommend Robinhood: Day Trading Pro. This book will teach you all the basics of investing with Robinhood. You will learn how to trade stocks, how to analyze stocks to find the best ones for your portfolio, and how to maximize your profits and minimize your losses.

There is a reference section at the end of the book that gives you tips and reminders that you should utilize as you start trading. 

Additionally, you can refer to this YouTube video from Andrei Jikh for a step-by-step tutorial on how to use Robinhood to buy and sell stocks: 

Final Thoughts

Robinhood does not take out taxes on its users’ investments. Instead, they will provide you with tax documents each year with the information that you must report when you file your taxes.

Any money that you earn on your investments, whether through sales or dividends, is taxable income. If you hold your investments for the long term, you will not have to pay taxes on them until you sell them, and you can even pay a lower tax rate if you hold them long enough. 

Recent Posts