M1 Finance: How Investment Taxes Are Handled

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M1 Finance Taxes Explained

Investing Simple is an affiliate of M1 Finance. This relationship does not influence our opinion of this platform.

M1 Finance offers automated investing and rebalancing of your portfolio or pie. In doing so, M1 Finance must make buy and sell orders that many times can create a taxable event for the investor. With the unique investing strategy M1 Finance offers, it may be difficult for investors to see and understand what is causing their taxable event, as well as when it occurs.


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Will M1 Finance Pies Cause Tax Consequences?

Any time there is a buy or sell in your account, as long as its a regular taxable brokerage account, there may be tax implications. Dividends and interest received within M1 Finance will also be subject to income taxes. M1 Finance claims to always make trades in the most tax efficient manor.

What this means is that they sell securities prioritizing them by…

  1. Losses that offset future gains
  2. Lots that result in long term gains
  3. Lots that result in short term gains

While M1 Finance tries to minimize your taxes, odds are that you will still have tax implications when it comes to year end. It is important to understand what these taxes might be before you begin investing. A good investor plans for and anticipates what taxes may be during the year. Trust me, nobody likes the surprise tax bill!

In this article, we talk more about the tax minimization feature offered by M1 Finance.

Taxes Using M1 Finance Retirement Accounts

One of the pros of investing with M1 Finance is that you can invest in a retirement account. This results in different tax situations that will be explained below. Remember, your tax situation may be different and we always recommend taking to a professional tax advisor!


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Distributions from Retirement Accounts

Unlike traditional brokerage accounts, taxes on retirement accounts are not incurred on a buy and sell basis. Dividends and interest will also not be taxed at the time they are received. The only time a taxable event occurs within a tax deferred retirement account is when money is distributed out of the account. Once funds are distributed to the account owner, the taxpayer must pay tax on those funds as ordinary income.

At the end of the year, you will receive from 1099-R for any funds that have been taken out of your retirement account(s). A copy of this form is sent to the IRS to ensure proper reporting of the income.

You will also receive from 1099-R for any distributions from a Roth IRA, however the form will be coded as a non-taxable distribution from a roth IRA.  Since the funds in a Roth IRA have already been taxed before they were deposited in the account, there will be no tax liability if funds are withdrawn. You should consult a tax professional for guidance on your specific tax situation.

Retirement Plan Early Distribution Penalty

However, early distributions out of any type of retirement account before age 59 1/2 will be subject to a 10% penalty. It is important that you commit to investing for the long term when you open a retirement account of any kind.

There are some exceptions to this 10% penalty rule such as first time home buyers, disability, medical, and higher education fees. You may also withdraw contributions out of a Roth IRA tax free as long as the account has been open for at least 5 years. Any earnings within a Roth IRA cannot be withdrawn before age 59 1/2 without the 10% penalty.

Retirement accounts offer a huge tax savings advantage to the keen investors who utilize them! If you are investing for years ahead, you should consider investing in a tax sheltered retirement account with M1 Finance.

What are capital gains and how are they taxed?

In a regular taxable brokerage account, any sell trades resulting in a gain or loss will incur a taxable event. If there is a gain on the security, it will result in a capital gain. Depending on the length of time you held the security, there will be tax implications.

M1 Finance offers a feature known as tax minimization. As the name suggests, this is designed to minimize your investment taxes. First, all capital losses are used to offset capital gains. If there are excess gains, you will have to pay taxes on that income. Capital gains and losses are categorized by short term and long term.



This is why the tax minimization strategy offered my M1 Finance can be helpful. M1 Finance will attempt to minimize taxes by incurring more long term gains, rather than short term gains, which will result in a lower tax rate.

In this article, we talk more about the tax minimization feature of M1 Finance.

What is a wash sale?

Investors recognize a capital loss on an investment when the investment is sold for a lower price than it was purchased for.

These realized capital losses can offset capital gains and reduce your ordinary taxable income by up to $3,000 per year. If you have more than $3,000 in capital losses, they can be recognized across multiple years.

There is a tax rule in place to prevent people from abusing this, known as the wash sale rule. A wash sale occurs when an investor sells a security for a loss and then attempts to buy it back within 30 days of the sale. In an effort to reduce artificial losses for tax purposes, the IRS disallows any wash sales.

If you attempt to sell a security for a loss then buy it back within 30 days the IRS will deny this loss. In order to avoid a wash sale, you would need to wait longer than 30 days before buying back the identical investment.

When will my M1 Finance tax forms be available?

M1 Finance will send you an email with your tax documents within the first couple months after the end of the calendar year, depending on your account type. Your tax documents will always be available through the M1 Finance website and mobile app.

One of the pros of investing with M1 Finance is that this platform integrates directly with TurboTax, H&R Block and TaxAct. This allows you to import your tax documents directly.

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