Where Robinhood can save users real money on commissions, the service trades user experience for tax inefficiency.
It’s not unrealistic for an investor to have some Shopify shares they acquired for $25, and some they acquired for $105. And that means that the investor would incur a different tax bill when they sell, depending on which lot of stock is sold.
18. $6. After-tax proceeds*C. $127. $139. In this example, the investor would be better off selling the Shopify stock purchased at a higher price in 2016, since it would trigger a smaller tax burden.
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.
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.
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.