Most brokers make it easy to choose which tax lots you want to sell when you place a sell order, but Robinhood doesn't allow you to choose. It uses a "first in, first out" method for tax purposes, also known as FIFO. When you sell stock with Robinhood, the stock you bought first is sold first -- period.
Full Answer
Is Robinhood FIFO or share lot liquidation?
After a series of emails back and forth with a responsive contact at Robinhood, and a correction from them on their initial response, the spokesperson explained that FIFO is actually their default method, as it is with most brokerage firms. They do allow customers to contact the support team to specify different share lots to use for liquidation.
Does Robinhood’s forced FIFO method cause high taxes?
So, while the forced FIFO method helps users avoid complicated tax decisions, it also means that its users may incur unnecessarily high taxes when they sell a portion of their holdings. To be clear, I have no personal vendetta against Robinhood.
Does Robinhood allow investors to choose the earliest shares to sell?
When you seek to minimize capital gains and thus taxes when you sell stock, you select to sell the shares that have the highest purchase price (i.e. the highest cost basis). Yet on Robinhood’s website it appears that investors do not have that choice and must sell (and thus use as the cost basis) the earliest shares purchased.
How much does Robinhood cost?
Send me an email by clicking here, or tweet me. Named after the legend who robbed from the rich to give to the poor, Robinhood offers commission-free stock and option trades at a time when even the least-expensive brokers charge $5 per trade.
When you sell stock on Robinhood, what happens?
When you sell stock with Robinhood, the stock you bought first is sold first -- period. Since stock prices generally increase over time, the earliest lots are most likely to have the largest amounts of gains, which could force investors to realize more gains and pay more in taxes when placing trades.
Why do you need FIFO when selling stock?
Forcing users to use FIFO when selling stock makes it more difficult to harvest losses to save on taxes and eliminates opportunities to minimize taxes on winning investments. To my knowledge, it's the only online broker that doesn't allow its users to choose which tax lots they sell when placing a trade.
How many shares of Shopify did Amazon buy in 2014?
If this investor wanted to sell some Shopify stock to buy five shares of Amazon, they would have to sell 63 shares of Shopify purchased in 2014, or 58 shares of Shopify purchased in 2016, to do it. Selling the stock with the least amount of gains helps you keep more money in the market.
Does Robinhood sell first in first out?
Most brokers make it easy to choose which tax lots you want to sell when you place a sell order, but Robinhood doesn't allow you to choose. It uses a "first in, first out" method for tax purposes, also known as FIFO. When you sell stock with Robinhood, the stock you bought first is sold first -- period.
Is Robinhood a good investment?
Robinhood can be an excellent choice for people who want to rapidly churn a small portfolio, since the commissions saved will likely paper over any incremental tax costs. But investors who take the long view and make larger investments may end up saving pennies in commissions and paying dearly in capital gains taxes.
What is Robinhood's first in first out method?
This means that your longest-held shares are recorded as having been sold first when you execute a sell order.
Do brokerage firms use FIFO?
While brokerage firms often use FIFO as the default, they do allow a choice. Using the longest-held shares makes it more likely that the capital gains will be long-term and taxed at a lower rate, but not always with the smallest gain, as this example shows.
Capital Gains Tax
Before we get into cost basis methods, we need to understand how investments are taxed. When stock shares are sold for a profit, the profit is referred to as “capital gains”. These capital gains incur taxes. However, depending on how long the stock shares had been held for, you’d pay either a long-term and short-term capital gains tax.
Tax Lot Accounting
For tax purposes, shares bought in a single transaction are referred to as a “tax lot”. A tax lot records information about a security, including dates of purchase and sale, cost, and sale price. By tax lot accounting, or keeping a record of your tax lots, you can make strategic decisions on which tax lots to sell to minimize taxes you need to pay.
Cost Basis Method
Cost basis is a term that simply refers to the purchase price of the stock. Cost basis methods are how we choose which tax lots to sell. Robinhood has a default setting to use the first in, first out (FIFO) method, which means the first tax lot you buy is the first to be sold (tax lot #1 in the previous example).
So how do we take advantage of this in Robinhood?
By default, Robinhood uses the FIFO cost basis method, as stated on it’s website.
Summary
In many instances, FIFO forces investors to unnecessarily pay more capital gains taxes than if you are able to choose tax lots. After reading this article, you should better understand how capital gains taxes are calculated, and how you, as the customer, can choose when to pay taxes.
