Robinhood’s halting of trading of certain stocks has many users reconsidering whether it’s the right platform to hold their cryptocurrency. Some users have considered moving their crypto assets to other platforms, only to realize that Robinhood does not allow cryptocurrency withdrawals.
This leaves Robinhood crypto users stuck between a rock and a hard place. If they want to exit the platform, their only option is to sell their crypto for cash. Unfortunately, this creates an unintended tax consequence.
For example, say you purchased 1 bitcoin (BTC) for $10,000 on Robinhood and now it’s worth $30,000. Since there is no option to withdraw this coin out of Robinhood, you’d have to sell it and receive the proceeds in cash so you could use the cash on another platform to re-purchase your bitcoin.
Sadly, cashing out your bitcoin creates a taxable event. In this case, you’d owe capital gains taxes on $20,000 of gains ($30,000 – $10,000). Since the cryptocurrency market is hovering near its all-time high, most people would likely incur a tax liability by switching trading platforms.
You could bypass this issue entirely by exclusively relying on cryptocurrency exchanges with withdrawal and deposit support. That way, if you ever want to change platforms for any reason, you can directly transfer your coins to another wallet of your choosing. Transfers between your own wallets are non-taxable.
Over the years, Robinhood has brought a wave of retail investors into finance and started exposing them to cryptocurrency. Its user-friendly interface has made it very easy for beginners to purchase cryptocurrencies without having to worry about self-custody and various complexities associated with traditional crypto exchanges. Unfortunately, recent events have shown a major weakness of the system: not being able to withdraw cryptocurrency assets without triggering taxes.
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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.