Anyone who is a beginner investing in the stock market is bound to ask how taxes are going to work. Even if you use a free service like Webull, it is important to keep these things in mind. At the end of they day, a hefty tax bill can eat into your total return.
When you are just starting out, it can be overwhelming to not know how you are going to file your taxes with your newly found investments. It is also important to consider how it is going to impact you come tax season.
You might be wondering what kinds of tools Webull offers to help with tax season, if any?
The good new is most, if not all, of the information that you already know about filing your taxes for your investments on other platforms will apply to Webull as well.
To break it down, services like Webull are required by law to report your investment information to the IRS.
This does not mean however that everything is just automatically done for you.
Webull can be a bit murky for the beginner if you’re just trying to google your way to the answers that you need, due to their lack of documentation on certain subjects. However, overall we have found it to be a great investing app for active traders.
In this article, we will aim to provide the necessary information you need to be aware of in terms of your taxes on Webull.
One of the best parts about Webull is new users get a free stock just for signing up and funding your account with any amount!
Taking care of your taxes at the end of the year should be no different than filing your taxes for any other investing service.
If you prepare your own taxes, you simply input the correct information into the required fields and send your forms over to the IRS.
Or, if you have a tax advisor, you will simply collect the forms sent to you via mail or email for them to prepare your return.
However, Webull has taken things one step further to make things even easier for you with the ability to import your taxes using TurboTax.
This can save you hours of going through and manually typing in the correct information when tax season rolls around. A real lifesaver for someone who does their own taxes.
One thing to keep in mind is that Webull and other free investing apps will not be mailing you tax forms. All communications will be handled electronically. You can either import directly into TurboTax or print out your tax forms yourself for you or your preparer.
Webull will send you an email a day before your tax documents are going to be ready for you to view.
They will then send you a follow-up email the next day with your tax documents attached.
The time in which you are going to receive your form is going to depend on the type of account, or accounts, that you have with Webull.
1099-R: You will receive this form if you received a distribution of $10 dollars or more from a retirement account.
Consolidated 1099: This form is used to assist you in filing your income tax return. This form will provide 1099-B from broker transactions, 1099-DIV for dividends, and 1099-INT for interest.
Form 5498: This is a form that your IRA trustee must file with the IRS stating contributions or conversions within your retirement accounts. You will not need form 5498 to file your taxes but you will receive a copy in the mail to keep in your records.
Through the Webull platform, you will have the opportunity to earn what is called a dividend. This is when companies distribute profits back to shareholders.
There are two types of dividends: qualified dividends and ordinary dividends.
Ordinary dividends will be taxed at your ordinary-income tax rate.
Qualified dividends are special dividends that are from US companies that have qualified to be taxed at a different rate, specifically, the long term capital gains rate. You must also have met the minimum holding period.
Interest income is also taxed at your ordinary income tax rate.
Municipal bonds would be an exception to this rule, as their interest is earned tax-free on the federal level and in some states.
So, in a nutshell, you will pay taxes on dividends earned within your account and interest earned.
Just like with any other form of investing, there will be a taxable event if you sell any positions which have resulted in a gain or a loss.
Capital gains and losses affect taxes in different ways but both will have tax implications.
It is important to note that any capital losses you accrue can be used to offset capital gains or ordinary income up to $3,000 in a given year.
To make that more clear, you will only have to pay taxes on the difference between your capital losses and capital gains.
There are two categories of capital gains and losses: short term and long term.
A short term gain is going to be taxed at your ordinary-income tax rate.
While a long term gain is going to be taxed at either 0%, 15% or 20% and this calculation depends on your ordinary income tax bracket.
To keep that as simple as possible, you will pay lower tax rates if you hold investments longer. That is why many people follow long term investing strategies, some of those followed by legendary investor Warren Buffett.
Webull offers retirement accounts on their site. According to them, “There are no opening, closing or annual fees for Webull's Traditional, Roth and Rollover IRAs.”
However, there are still taxes that apply to these accounts.
Retirement accounts will not be taxed on dividends and interest when they are received. Instead, if taxes are paid, its when money is disbursed out of the account.
Roth IRAs are retirement accounts that are funded with after-tax dollars. If you take money out of your Roth IRA as a qualified distribution then you will not owe income taxes. This is because you already paid taxes on your contributions to the account.
If you take an early non-qualified distribution out of a retirement account you may be charged a 10% penalty. This is in addition to income taxes on the funds. For most retirement accounts, you will need to wait until you are 59 and ½ to take a qualified distribution.
There are a few exceptions to the penalty such as buying a house for the first time, disabilities, medical bills and paying for higher education. Make sure your retirement plan allows for these exceptions before you take an early distribution.
But as a general rule of thumb, you want to avoid pulling money from these accounts.
People generally use retirement accounts for long term investing and should be a part of most financial plans.
Roth IRA accounts again have an exception here as you can withdraw contributions (not earnings) from them as long as the account has been open for 5 years or more.
However, any earnings accrued in a Roth IRA are subject to the 10% penalty unless you meet the required age of 59 1/2.
There may be a time when you sell an investment at a loss. If this happens, it is important that you remember the wash sale rule.
A wash sale is what takes place when you sell a security for a loss and then try to buy it back within 30 days of the original sale.
The IRS will deny a loss if you try to do this in efforts to deter people from generating large tax losses.
That means that you will not be able to offset any gains or deduct this loss from your personal income.
When you sign up with Webull, they require you to give them information like your address and your social security number. This is because federal law re to report your investment activity to the IRS. Because of this, it is very important that you take this into consideration what your taxes will be.
Your taxes with Webull are no different than your taxes with any other form of investing and are subject to the same taxes regardless of any services that Webull offers.
However, keep in mind they will be sending all tax documents electronically. They do not offer mailed copies.
Webull does support the ability to import your documents to certain tax software.
As long as it is within a taxable account (non-retirement account), you may owe taxes on capital gains, dividends and interest earned within the account.
This is why holding an investment long term, or greater than 1 year, can be beneficial in certain tax situations.
It is also worth considering that certain investments like municipal bonds are exempt from taxes on the federal level as well as in some states. Typically investors in higher tax brackets will benefit more from the tax benefits municipal bonds offer.
For those who are eligible, contributing to a traditional IRA is a good way to get a tax deduction before you file your taxes. You have time to do these for the previous tax year up to the tax return deadline, April 15th.
Webull also offers retirement accounts such as the Roth IRA which can be useful in long term saving for retirement.
If you want to get started with Webull, use our link below to get a free stock!