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Answers to Common Questions from New Investors on Investor Apps, Accounts, and Taxation Forms

Updated for Tax Year 2021 • January 21, 2022 05:03 PM

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OVERVIEW

Trading stocks can have an outcome on your taxes. Using an investing app such as Robinhood, Acorns, or SoFi tin can hateful you may be receiving revenue enhancement forms from these providers. If y'all're a first-time investor, here are the answers to a few common questions about investment accounts, how gains are taxed, and what yous can expect from the IRS when it's time to file.

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To grow wealth, you need to invest. As a showtime-time investor, you may accept a lot of questions about buying and selling stocks. Fortunately, easy-to-use investing platforms like Robinhood, Acorns, SoFi, and others provide an affordable culling to picking stocks or common funds on your own or paying a wealth manager to invest your money for you.

There's a lot you may want to know about selecting investments, what to do with your Acorns or Robinhood tax forms, and how your investment gains and losses are taxed. Here are answers to common questions for people who are new to investing.

Which types of accounts are good for showtime-time investors?

Equally a start investor, y'all should consider investing in tax-favored retirement accounts.

Tax-favored accounts, such as an IRA or 401(g), allow you to invest without paying taxes on your investment earnings until you withdraw money from the account during retirement. By fugitive yearly taxes on your investment income, you can have reward of greater compounded growth until y'all pull the money out.

If y'all have a 401(k) plan at piece of work, that'due south a corking place to start investing. Contributions to a 401(k) reduce your taxable income for the year, then yous pay less in federal income tax. For 2021, y'all can contribute upwards to $19,500 to a 401(g) plan and another $6,500 if you are aged l and over. If your employer offers matching contributions, that's like getting gratuitous money in your account.

Yous can too contribute to an IRA, whether or not y'all invest in a 401(1000). For 2021, you can contribute up to $vi,000 to either a traditional IRA or, if yous qualify, to a Roth IRA. Tax deductions for traditional IRA contributions con be reduced or eliminated at college income levels. Y'all tin can deduct qualified contributions to a traditional IRA, just you pay taxes on withdrawals of both your contributions and earnings. Contributions to a Roth IRA aren't tax deductible, merely yous can withdraw both contributions and earnings tax-free in retirement.

Starting with index funds

If yous've gotten the hang of retirement accounts, alphabetize funds are typically an piece of cake and low-toll fashion to invest in the stock market. An index fund is a portfolio of stocks designed to match or rails a item fiscal market index, such equally the S&P 500 or the Dow Jones Industrial Average. Alphabetize funds are a popular option among new investors because they offer immediate diversification — i share of an index fund can provide buying in hundreds of different companies across several industries – and someone else – the fund managing director – is making the decisions on which investments to brand. In that location are ii main categories of index funds – index mutual funds and alphabetize exchange traded funds (ETFs). One primary departure between the 2 is that ETFs can be traded throughout the day much in the same was as a stock while mutual funds trade at the cease of each day at a price based on that day's endmost value of the fund.

Y'all tin purchase an index mutual fund or ETF directly from a fund provider such as Vanguard. ETFs can exist purchased through investing apps such every bit Robinhood or Acorns. Investment companies such equally Fidelity and Charles Schwab allow you lot to buy both ETF and common funds likewise every bit many other investments such equally individual stocks and bonds.

Should y'all manage your own portfolio, utilize an app?

Almost investment companies help you create a portfolio based that is managed by a robo-advisor. Sounds piece of cake enough to practise it yourself, right? While you lot tin build and manage your own portfolio, investment companies like Robinhood, Acorns, and Schwab offering new investors a few helpful features.

• Help in selecting investments. Robo-advisors, such equally Edification, typically have you complete a questionnaire to provide information on your investment goals, time horizon and gamble tolerance. Based on that information, the app creates your portfolio.
• Automatic rebalancing. Over time, investment gains and losses can cause your portfolio to exist out of rest. A robo-advisor will periodically purchase or sell assets within your portfolio to ensure information technology'due south still in line with your financial goals.
• Depression upfront investment minimums. Many mutual funds have hefty initial investment minimums — anywhere from $1,000 to $3,000 or more. Many get-go investors can't afford to invest thousands of dollars right out of the gate. Robinhood and some other investment companies have low or no account minimums; they may also crave a more hands-on approach.

If you don't accept a lot of money to invest correct at present or much time to spend researching investments and managing your portfolio, an app is a good place to start.

What type of tax forms will you receive?

Around the finish of Jan, investors might receive several 1099 revenue enhancement forms in their mailbox or electronic mail inbox. Here are a few of the nearly common forms you lot might receive and what to practice with them.

• 1099-INT. Yous should receive Form 1099-INT from your depository financial institution or investment accounts if y'all earn more than $x in involvement income from your account. If your full taxable involvement and dividend income combined for the twelvemonth is more than $1,500, you'll demand to include Schedule B with your tax render to report the name of each payer and the amount of interest you received. Otherwise, you simply study your total interest income direct on Form 1040.
• 1099-DIV. You typically receive Course 1099-DIV if you earn more than $10 in dividend income or capital gains distributions during the twelvemonth. Y'all'll report those dividends on Form 1040 and also on Schedule B attached to your tax return if your dividends exceed a sure amount.
• 1099-B. You typically receive Course 1099-B if you sell stocks, bonds or other investments during the twelvemonth. This grade usually includes information on what you sold, the date you lot bought and sold it, how much the investment cost and how much you received when you sold information technology. You lot'll use this grade to report majuscule gains and losses on Schedule D and Grade 8949.

Whether y'all received a Robinhood tax course or a tax course from some other investment institution, if you lot use TurboTax to prepare your tax return, you can import your investment data from hundreds of participating financial institutions.

What are majuscule gains and how are they taxed?

When you sell an investment, you ofttimes pay taxes on the profit you lot brand from the sale. This profit is called a uppercase gain.

To calculate your capital letter gains and losses, y'all need four pieces of information:

1. The engagement you purchased the investment.
2. The corporeality yous paid, including any fees, plus any additional investments, such as reinvested dividends.
3. The date you sold the investment.
4. The sales price you received, including whatsoever fees.

The amount of tax you lot'll pay on the capital gain typically depends on how much you made from the sale and how long y'all owned the asset.

• Brusk-term. If y'all owned the investment for i yr or less, the sale is a short-term capital proceeds or loss. Short-term capital gains are taxed at the same rate as your ordinary income, such equally wages from a chore. Ordinary income tax rates for the 2021 taxation twelvemonth range from ten% to 37%. You lot can effigy out which revenue enhancement bracket you're in using our Tax Bracket Calculator.
• Long-term. If y'all owned the investment for longer than 1 year, the sale is a long-term majuscule gain or loss. Long-term majuscule gains are typically taxed at special long-term capital gains rates, ranging from 0% to twenty%.

For most people, the long-term capital letter gains tax charge per unit is lower than their ordinary income revenue enhancement rate, and so information technology can be advantageous to concord investments that have increased in value for longer than one yr before selling them.

Is exercising an employee stock choice taxable?

Employee stock options let employees to buy their employer'due south stock at a disbelieve. The option alone doesn't typically give the employee an ownership involvement in the company, but exercising the option to buy the stock does.

There are two main types of stock options, each with its own taxation results.

• Statutory stock options. Statutory stock options are granted nether an employee stock purchase plan or an incentive stock pick plan. Receiving a statutory stock pick doesn't result in a taxable transaction, but exercising your option and selling the stock does. Simply exercising the option without a sale typically doesn't have any tax consequences either, although you'll have to employ Form 6251 to decide whether you owe the Alternative Minimum Tax (AMT).
• Nonstatutory stock options. Nonstatutory stock options are granted without ane of these plans. When you exercise a nonstatutory stock pick, you owe revenue enhancement on the difference between the price y'all paid for the stock and its fair market place value on the date you exercise the option.

When you use TurboTax to fix your revenue enhancement return, you but need to answer some simple questions nearly your options. The software volition do the calculations and make full in all of the right tax forms for you lot.

How tin yous manage your investment accounts so you can easily and accurately pay taxes on investment gains?

Investing can help you build wealth and grow your retirement nest egg, simply at that place are tax implications when you brand money on your investments.

The following investment tips can make information technology easier to file your tax returns.

• Invest in tax-favored retirement accounts. When you invest in a 401(yard) or IRA, yous don't need to worry about taxes — as long as you exit the money in the account. Any interest, dividends and capital gains from your account tin can be reinvested and abound on a tax-deferred basis until you first taking withdrawals. This makes tax reporting easy because you don't have anything to written report on your taxation return except for tax-deductible contributions to your account.
• Go on good records. For investments outside of a tax-favored retirement account, you usually demand to report details of any interest, dividends, and uppercase gains and losses. In nigh cases, you'll receive a 1099 with this information from your financial establishment. However, whether or not you receive a 1099, you're responsible for reporting all of your income to the IRS when you file your tax return. So go along good records of any investment purchases, sales and income. Having that information on mitt volition make filing your tax return (and paying the right amount) a lot easier.

The subject of taxes pops up pretty much anytime income is involved, and investing is no exception. But calculating and paying taxes on your investment income doesn't have to be a task. TurboTax Premier is designed for investors of all experience levels. Increase your tax noesis and understanding – all while doing your taxes.  TurboTax Premier walks you through investment taxation scenarios including stocks, bonds, ESPPs, robo-investing, cryptocurrency, rental property income, and more. It also makes reporting your tax transactions easy and fast because you can automatically import and upload your investments from hundreds of participating financial institutions — including those Betterment, SoFi, Acorns, Robinhood tax forms, and more.

Whether yous have stock, bonds, ETFs, cryptocurrency, rental property income or other investments, TurboTax Premier has you covered. Filers can easily import upward to x,000 stock transactions from hundreds of Financial Institutions and upwards to iv,000 crypto transactions from the top crypto exchanges. Increment your tax knowledge and understanding all while doing your taxes.

Get your investment taxes done right

From stocks & crypto to rental income, TurboTax Premier has you covered.

Have investment income? We have you covered.

With TurboTax Live Premier, talk online to real experts on demand for revenue enhancement communication on everything from stocks, cryptocurrency to rental income.

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The above article is intended to provide generalized fiscal information designed to educate a broad segment of the public; information technology does not give personalized tax, investment, legal, or other business and professional person advice. Earlier taking whatsoever action, you should always seek the assistance of a professional who knows your item situation for advice on taxes, your investments, the law, or any other business and professional matters that touch you and/or your concern.

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