Buzz
Promotions for platforms like Stash, Acorns, and Robinhood suggest that starting an investment journey with just a few dollars is a breeze. But those new to microinvesting should be aware that while making extra money may seem easy, it could lead to extra tax paperwork come filing time.
Handling taxes on your likely modest microinvestment returns shouldn’t stop you from using investment apps. However, it’s wise to understand what you might owe before withdrawing your earnings and planning a spending spree.
Microinvestment accounts are subject to the same tax treatment as regular investment accounts. At the end of the tax year, you should expect to receive a range of tax forms related to your earnings.
1099-MISC
If you receive cash bonuses or referral rewards from your microinvesting platform and those bonuses total $600 or more, you'll get a 1099-MISC. The IRS will treat this money as taxable income.
1099-B
A 1099-B will be sent to you by your microinvesting platform if you sold any investments in that tax year. When you sell an investment, you’ll owe taxes on the profits, known as capital gains. If you sold at a loss, those losses will also need to be reported, potentially lowering your taxable income. The tax rate depends on how long you held the asset.
1099-DIV
If your investments perform well enough to generate profit-sharing dividends, you’ll receive a 1099-DIV for any dividend earnings you withdraw. The taxes owed will depend on your income level and how long you’ve held the investment.
1099-INT
Earning more than $10 in interest from any financial institution means you'll receive a 1099-INT. This interest is taxed as income.
Whether you owe taxes depends on your overall tax situation
If you enjoy microinvesting, don’t let taxes stop you. Just be prepared for the extra complexity when filing your annual return. Even if your investments do well, any taxes owed could be offset by other deductions that lower your taxable income. While it’s possible to move into a higher tax bracket with unexpectedly high returns, most casual microinvestors will not face significant tax increases.
If you're anxious about not being ready when tax season arrives, consider setting aside 30-50% of any funds you withdraw from your microinvesting account. Once your taxes are filed and you've put your tax worries to rest, you can freely use the remaining funds as you wish.
Although the IRS forms you receive are the same across platforms, each investment app operates a bit differently. If you have questions about your account, check the company’s FAQ or reach out to customer service, but don’t expect tax guidance from them. For accurate advice on reporting your investment income, consult a tax professional.
