Do You Have to Pay Taxes on Robinhood If You Don’t Withdraw Money?

The Surprising Truth About Robinhood Taxes Most Traders Miss

Let’s face it – Robinhood has made investing incredibly accessible. With its sleek app and zero commission trades, it’s no wonder so many people (especially younger investors) have jumped into the market through this platform. But there’s a common misconception that’s causing a lot of headaches come tax season.

Here’s the quick answer: Yes, you absolutely have to pay taxes on your Robinhood trades even if you never withdraw a penny from your account. This is one of the most misunderstood aspects of trading on platforms like Robinhood.

As someone who’s worked with many new investors, I’ve seen this mistake cause serious problems. Let me break down everything you need to know about Robinhood and taxes to help you avoid an unpleasant surprise from the IRS.

The Big Misconception About Robinhood and Taxes

Many people believe that as long as they keep their money in their Robinhood account and never withdraw it, they don’t have to pay taxes. This is 100% false.

“A common misconception is that you can trade as much as you like, and if you don’t withdraw money, you owe no taxes While this holds true in retirement accounts, it does not with taxable (non-retirement) investment accounts”

This is probably one of the most dangerous myths in retail investing today Let me explain why

Robinhood currently only offers taxable investment accounts (not retirement accounts like IRAs or Roth IRAs). This means every transaction you make is reported to the IRS, whether you withdraw the money or not.

How Taxes Work With Robinhood

When you buy and sell investments on Robinhood, here’s what happens from a tax perspective:

1. Every sale is a taxable event – regardless of whether you withdraw the money
2. Robinhood reports all transactions to the IRS – they’re legally required to do this
3. You’ll receive tax documents (usually a Form 1099) from Robinhood by February

The amount of tax you’ll pay depends mainly on:

• How long you held the investment
• Your total income
• Whether you made a profit or loss

Short-Term vs. Long-Term Capital Gains

Here’s where timing makes a huge difference

Short-Term Capital Gains (Investments Held Less Than a Year)

• Taxed at your ordinary income tax rate
• Can be as high as 37% federal tax
• Plus any applicable state taxes
• This hits day traders and frequent traders hardest

Long-Term Capital Gains (Investments Held More Than a Year)

• Usually taxed at 15% for most income brackets
• Can be as high as 23.8% for high earners
• No capital gains tax if your taxable income is under $40,400 ($80,800 for married couples)

Real Example: The $800,000 Tax Bill Surprise

Believe it or not, some Robinhood traders have been hit with tax bills as high as $800,000! This usually happens when traders:

1. Make frequent trades (creating lots of short-term capital gains)
2. Don’t set aside money for taxes
3. Don’t understand rules like wash sales (more on this below)
4. Are in high tax brackets

The Wash Sale Rule: A Tax Trap for New Traders

This is where many new Robinhood users get into trouble. The wash sale rule states:

If you sell an investment at a loss and then buy the same or a “substantially identical” investment within 30 days before or after the sale, you cannot claim that loss for tax purposes.

This rule exists to prevent tax manipulation, but it catches many new traders who don’t know about it. If you’re actively trading the same stocks repeatedly, you might be creating wash sales without realizing it.

What About Losses? Can They Help?

There is some good news! If you’ve had losses on Robinhood, they can help reduce your tax burden:

• You can use capital losses to offset capital gains
• You can deduct up to $3,000 of net capital losses against ordinary income per year
• Excess losses can be carried forward to future tax years

This strategy is called “tax-loss harvesting,” but remember the wash sale rule when attempting this!

Different Types of Accounts and Their Tax Implications

It’s worth noting that Robinhood only offers taxable accounts currently. If they eventually offer retirement accounts, the tax rules would be different:

• Traditional IRA: No taxes on trades within the account, but withdrawals are taxed as ordinary income
• Roth IRA: No taxes on trades or qualified withdrawals
• Taxable account (what Robinhood offers now): All sales potentially subject to capital gains tax

Custodial Accounts for Minors on Robinhood

If you’ve set up an account for your child, the tax situation gets even more complex:

For children under 19 (or under 24 if they’re full-time students):

• First $1,050 of unearned income: No taxes
• Next $1,050: Taxed at the child’s rate
• Anything over $2,100: Taxed at the parent’s rate (which is usually higher)

This is known as the “kiddie tax” and is designed to prevent parents from shifting investment income to their children to lower their tax burden.

How to Handle Your Robinhood Taxes

So what should you do to stay on top of your Robinhood taxes? Here are my recommendations:

1. Track all your trades throughout the year – don’t wait until tax time
2. Set aside money for taxes after profitable trades – I suggest 25-30% to be safe
3. Consider using tax software that can import Robinhood data directly
4. Consult with a tax professional if your trading is frequent or complex
5. Consider long-term investing strategies to benefit from lower tax rates

What If You Can’t Pay Your Robinhood Tax Bill?

If you find yourself with a larger tax bill than expected, don’t panic:

• The IRS offers installment payment plans
• You can request a temporary delay of collection
• In some cases, you may qualify for an offer in compromise

The worst thing you can do is ignore the bill or fail to file your taxes. The penalties for not filing are much higher than the penalties for not paying.

Final Thoughts: Trading Responsibly on Robinhood

Robinhood has democratized investing in many ways, which is fantastic. The ease of use and zero-commission trades have brought millions of new investors into the market. However, this ease can create a false sense of simplicity when it comes to taxes.

Remember:

• Every sale is a potential tax event
• You owe taxes whether you withdraw or not
• Short-term trades are taxed much higher than long-term investments
• The IRS already knows about your trades through Robinhood’s reporting

FAQs About Robinhood Taxes

Q: If I reinvest all my profits back into stocks, do I still have to pay taxes?
A: Yes, absolutely. Reinvesting doesn’t eliminate your tax liability.

Q: Does Robinhood withhold taxes from my trades?
A: No, Robinhood doesn’t withhold taxes. You’re responsible for paying them yourself.

Q: What tax documents will I get from Robinhood?
A: You’ll typically receive a Form 1099 showing your trades, dividends, and other taxable events.

Q: If I only lost money on Robinhood, do I still need to report it?
A: Yes, you should still report losses as they can offset other gains and potentially reduce your taxable income.

Q: How does cryptocurrency trading on Robinhood affect my taxes?
A: Crypto is treated as property by the IRS, so you’ll owe capital gains taxes when you sell or trade cryptocurrency at a profit.

Remember, investing can be fun and potentially profitable, but we all gotta deal with taxes. Better to understand them up front than be shocked when April rolls around!