Earned money on your Robinhood account? Why you shouldn’t be so quick to cash out
Don’t just take the money and run away.
- Many people have made money by investing in stocks and other assets.
- Before cashing in your profits, consider the tax implications.
Any money you need for short-term goals or emergencies should be kept in a savings account. This way you know that your capital is protected.
But if you have cash on hand that you don’t need in the short term, it’s worth investing it, whether in stocks, cryptocurrency, or another asset. The reason? Investing your money involves risk, but there is also the potential to generate strong returns.
If you’ve invested in a brokerage account like Robinhood, you may have made money on that account because of the value of your investments. And now you might be tempted to cash out your investments and use that money as you see fit, whether it’s going on vacation or pursuing another goal. But before cashing in your brokerage account, you will need to understand the tax implications involved.
Your winnings don’t all belong to you
Whenever you sell an asset for more than you paid, you are subject to capital gains tax. The amount of these taxes will depend on how long you held the assets in question before selling them.
If you sell investments like stocks or cryptos before you’ve held them for at least a year and a day, you’ll be subject to short-term capital gains taxes on your profits. Short-term capital gains taxes are comparable to the taxes you pay on ordinary income, and they can significantly reduce your profits.
On the other hand, if you hold your investments for at least a year and a day before selling them, you will be relegated to the more favorable category of long-term capital gains tax. This will result in less of a tax bill.
That’s why if you’re sitting on gains in your brokerage account, you shouldn’t rush to cash them out. Rather, you need to understand how they might impact your taxes.
For example, let’s say you are looking at short-term earnings of $5,000 in your brokerage account and you are a single filer earning $80,000 per year. In this case, your tax rate for your capital gains will be 22% and your tax bill will be $1,100.
Now, let’s say you’re looking at $5,000 in long-term capital gains. In this case, your tax rate will be 15% and your IRS bill will be $750.
If you have a higher income, it is especially important to try to hold your investments for at least a year and a day before selling them. Long-term capital gains peak at 20% for high earners. But short-term capital gains tax rates for high earners can be as high as 37%.
Another reason not to sell
Cashing in on investments too quickly could leave you with a huge tax bill on your hands. Plus, cashing in prematurely could mean missing out on additional growth.
If you are in dire need of money and don’t have cash in reserve, you may want or need to cash out investments in your brokerage account. But if that need doesn’t exist, holding quality investments for many years might be a smarter financial decision, as your portfolio could gain a lot of value over several decades.
Using the wrong broker could cost you dearly
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