Ads for apps like Stash, Acorns and Robinhood make it look easy to start investing with just a few dollars. But microinvesting newbies should be aware that using these apps to try to make a few extra bucks could leave you with some extra paperwork come tax season.
Dealing with taxes for your likely-modest microinvesting earnings isn’t a reason to avoid investment apps altogether. But it helps to know what you could end up owing before you withdraw your investment earnings and plan to splurge.
Microinvesting accounts are treated like regular-sized investing accounts when it comes to taxes. After the end of the tax year you can expect to receive some variety of the following tax forms:
1099-MISC
If you earn any sort of cash bonuses or other referral rewards from your microinvesting app, and those bonuses total $600 or more, you can expect a 1099-MISC. That money will be taxed as income.
1099-B
You’ll get a 1099-B from your microinvesting app if you sold any of your investments during that tax year. When you sell an investment, you pay taxes on the profit, called capital gains. If you sell an investment at a loss, you’ll also report those losses to the IRS, and the losses may reduce your taxable income. This tax rate can vary depending on how long you held the investment.
1099-DIV
If your investments do so well that a portion of the profit is shared with investors, you’ll get a 1099-DIV form for investment dividend earnings that you withdraw. The tax you may owe depends on your income level and how long you’ve held the investment.
1099-INT
If you earn interest of more than $10 through any financial institution, you’ll get a 1099-INT. This interest is taxed as income.
Whether you’ll owe depends on your overall tax profile
If you enjoy microinvesting, the tax implications aren’t a reason to stop. This is just a reminder that you should be prepared for the added complexity of your annual return. Even if your investments do well, any amount you might owe could get canceled out by other factors that could reduce your taxable income. You could also get bumped into a higher tax bracket if you have a surprisingly great outcome from your microinvesting, but a casual user of these apps will likely not see that kind of dramatic impact.
If you’re nervous about being unprepared when tax time rolls around, consider saving 30-50 percent of any funds you withdraw from a microinvesting account. After your taxes have been filed and your worries about a tax bill have been calmed, you can use the funds that remain to your liking.
While the IRS forms you receive are universal, each company runs their investing apps a bit differently. Check the company’s FAQ or ask customer service if you have questions about your account, but don’t expect to get tax advice there. For advice on how to report your investment earnings correctly, ask a tax professional.
