Acorns Tax Implications: What to Know About Withdrawals and Reporting

Acorns, a popular micro-investing app, simplifies investing by rounding up everyday purchases and investing the spare change. However, users must understand the tax implications associated with their investments and withdrawals to ensure effective financial planning and compliance.

Gains When Selling Positions

Selling positions within your Acorns account carries tax implications based on whether the gains are short-term or long-term. Short-term capital gains, for assets held one year or less, are taxed at ordinary income tax rates, ranging from 10% to 37% in 2024, depending on your taxable income. Long-term capital gains, for assets held longer than a year, are taxed at lower rates of 0%, 15%, or 20%, depending on your income bracket.

The distinction between short-term and long-term gains can significantly affect your returns. For instance, a $1,000 short-term gain in the 24% tax bracket results in a $240 tax liability, while the same amount as a long-term gain may incur only $150 in taxes if you fall within the 15% bracket. Timing your sales strategically can help optimize your tax outcomes.

Additionally, the Net Investment Income Tax (NIIT) imposes an extra 3.8% tax on certain investment income for individuals with modified adjusted gross income above $200,000 ($250,000 for married couples filing jointly). This tax underscores the importance of considering your overall income level when planning transactions.

Dividends and Distributions

Dividends and distributions from Acorns investments also carry tax implications. Dividends are classified as either qualified or non-qualified. Qualified dividends benefit from favorable tax rates of 0%, 15%, or 20%, similar to long-term capital gains, while non-qualified dividends are taxed at ordinary income tax rates.

For example, receiving $500 in qualified dividends while in the 15% tax bracket would result in a $75 tax liability. The same amount in non-qualified dividends could incur a $120 tax if you are in the 24% bracket. Understanding the type of dividends you receive can guide your investment strategy.

Distributions from mutual funds or exchange-traded funds (ETFs) may include dividends, interest, or capital gains, each with distinct tax treatments. Capital gains distributions are typically taxed at capital gains rates, while interest is taxed as ordinary income. Reviewing the distribution breakdown of your funds is critical for accurate tax planning.

Mandatory Reporting Requirements

Investing through Acorns requires navigating mandatory tax reporting, primarily through Form 1099, which is issued annually. This form provides details on various types of income and transactions, including dividends (Form 1099-DIV) and proceeds from sales (Form 1099-B).

Accurate reporting is essential to avoid audits or penalties. The IRS requires all taxable income to be reported, and the information on Form 1099 must align with your tax return. Even if your investment income is below the $10 threshold for Acorns to issue a form, you are still responsible for reporting that income.

Additional complexities may arise if you use tax-advantaged accounts like IRAs, which have unique reporting requirements and contribution limits. Noncompliance, such as inaccuracies or omissions, can result in penalties starting at $50 per form and escalating with continued errors.

Withholding or Estimated Payments

Unlike wages, which typically have taxes withheld automatically, investment income requires proactive tax management. The IRS mandates that taxes be paid as income is earned, including income from investments. If your Acorns investments generate significant income, you may need to make estimated tax payments to avoid penalties.

Estimated payments are required if you expect to owe $1,000 or more in taxes when filing your return. These payments are calculated by estimating your total tax liability for the year and subtracting withholding and credits. For instance, if your total tax liability is $4,000 and $2,000 has been withheld from other sources, you must cover the remaining $2,000 with estimated payments, submitted quarterly using Form 1040-ES.

Automatic Round-Ups and Potential Taxable Transactions

Acorns’ automatic round-ups feature invests spare change from everyday purchases, creating a steady stream of micro-investments. However, these transactions may trigger taxable events. Each round-up contributes to the purchase of securities, which can generate dividends or capital gains. These must be reported and taxed accordingly.

Frequent round-up transactions can accumulate into a significant sum, impacting your overall tax liability. If you sell these investments, determining whether the gains are short-term or long-term is essential to calculate the appropriate tax rate.

Additionally, the Found Money feature, where partner companies contribute to your Acorns account based on your shopping activity, may be considered taxable income. Assessing how these contributions affect your overall financial picture, including whether they push you into a higher tax bracket, is vital for effective tax planning.