Opening a new brokerage account often comes with the enticing offer of a cash bonus. While free money always sounds appealing, many wonder if these brokerage bonuses are taxable. The short answer is yes, brokerage account bonuses are considered taxable income. However, the full tax implications depend on the type of account and when you receive the bonus.
How Brokerage Bonuses Work
Brokerage firms like Fidelity, Vanguard, and Charles Schwab constantly compete for new customers. A common promotional tactic is to offer a cash bonus for opening a new brokerage account and meeting certain deposit or balance requirements.
For example, a brokerage may offer $200 for opening a Roth IRA account with an initial deposit of $10,000. Or they might give $500 for starting a taxable account and maintaining a $25,000 balance for 3 months.
The bonus money can only be used within your brokerage account. You can’t simply withdraw it as cash. The brokerage will deposit the bonus as cash into your new account once you meet the promotional terms. You can then invest the money or use it to buy stocks, bonds, ETFs, etc.
Tax Treatment of Various Account Types
The taxability of a brokerage bonus depends largely on what type of account you open. Brokerage accounts generally fall into three categories:
Tax-Deferred Retirement Accounts
This includes Traditional IRAs, Roth IRAs, and employer-sponsored plans like 401(k)s. Contributions to these accounts may be tax-deductible or made with after-tax dollars. But either way, the accounts allow your investments to grow tax-deferred. You don’t pay taxes on capital gains, dividends, or interest earned inside the account.
Brokerage bonuses to retirement accounts are treated similarly. The bonus money can grow tax-deferred and is not considered taxable income in the year received. However, you will owe ordinary income taxes on withdrawals from Traditional IRAs and 401(k)s in retirement. Roth IRAs offer tax-free withdrawals.
Taxable Investment Accounts
These regular brokerage accounts don’t offer any special tax treatment. You must pay taxes on capital gains, dividends, and interest earned each year. Common examples include individual taxable accounts and joint investment accounts.
Any bonus money deposited into a taxable account is treated as ordinary income. You must report the bonus as “Other Income” on your tax return and pay any income taxes owed in the year you receive the funds.
Education Savings Accounts
This includes 529 college savings plans and Coverdell ESAs. While contributions are made with after-tax dollars, the accounts allow tax-free growth and withdrawals if used for qualified education expenses.
Brokerage bonuses to these accounts are not considered taxable income. The bonus money can grow tax-deferred and is tax-free when withdrawn to pay for college costs.
When You Must Pay Taxes on a Brokerage Bonus
In most cases, you’ll owe income taxes on a brokerage account bonus in the year you receive the funds. However, the specific timing depends on a few factors:
- Account Type – As discussed above, bonuses to tax-deferred and education accounts are not taxed until withdrawn. You only pay immediate income tax on bonuses to taxable investment accounts.
- Bonus Requirements – Some brokerage bonuses are deposited immediately when you open your account. Others require you to maintain a certain balance or deposit level for a period of time first. In either case, you are taxed in the year the bonus money hits your account.
- Liquidation Requirements – Rarely, a brokerage bonus may require you to purchase company stocks or hold the bonus funds for a period of time after deposit. This type of restricted bonus isn’t taxed until the limits are lifted and you have full control of the funds.
- 1099 Form – Your brokerage is required to issue Form 1099-MISC reporting any taxable bonus payments over $600. You must report this income on your tax return even if you don’t receive the 1099.
How to Report Taxes on a Brokerage Bonus
Reporting taxes on broker bonuses is fairly straightforward on your annual tax return.
If you received a 1099-MISC for the bonus, you would include it with your other 1099s when preparing your taxes. The full bonus amount is reported on Line 3 as “Other Income”.
If no 1099 was issued, you simply need to list the taxable bonus amount on Line 21 of Form 1040 as “Other Income”.
The bonus income is taxed at your ordinary income tax rate based on your total taxable income and filing status. It will increase your adjusted gross income and overall tax burden for the year.
Claiming Losses to Offset Taxes
Some investors worry about a brokerage bonus pushing them into a higher tax bracket. Or they don’t want to owe taxes on bonus funds they can’t actually withdraw in cash.
If this applies to you, one strategy is tax-loss harvesting. You can sell investments at a loss to offset capital gains and income from other sources, including a brokerage bonus. This allows you to lower your tax liability from the bonus.
For example, say you earn a $500 brokerage bonus but also realize a $600 capital loss in your taxable account this year. If you report both on your tax return, the loss would cancel out the bonus income and lower your taxes by an additional $100.
Other Factors That Determine Taxability
While brokerage bonuses are typically taxable, there are some exceptions and considerations:
- Spouse’s Account – If you open a joint spousal brokerage account, only the spouse who claims the income for tax purposes owes tax on the bonus. You can alternate who reports the income each year.
- State Income Taxes – In addition to federal taxes, you may owe state income taxes on brokerage bonuses if your state treats investment income as taxable.
- Age – Brokerage bonuses likely count as taxable investment income for purposes of the “kiddie tax” if the account owner is under age 19 or a full-time college student under 24.
- Business Accounts – Tax-advantaged retirement plans like Solo 401(k)s allow tax-deductible contributions from business income. Any brokerage bonuses would lower your deductible business income.
- Estate Accounts – Inherited brokerage accounts may have different tax treatment for bonuses compared to traditional individual accounts.
Smart Strategies to Reduce Taxes on Bonuses
Here are some savvy moves to consider if you want to minimize taxes on a brokerage account bonus:
- Open the account and earn the bonus in a low-income tax year when possible. This reduces the impact on your top tax bracket.
- Contribute the bonus to a Roth IRA rather than a taxable account. Income taxes are prepaid so you can enjoy tax-free growth.
- Invest bonus funds in municipal bonds if in a taxable account. This provides federally tax-free interest income.
- Use bonus for retirement plan contribution. This reduces your taxable income by the bonus amount if you weren’t already maxing out contributions.
- Reinvest any earnings from the bonus during the year instead of withdrawing. This defers taxes on investment growth from the bonus money.
Frequently Asked Questions
Are all brokerage bonuses taxable?
In most cases, yes. Bonuses to taxable investment accounts are always taxed as ordinary income when deposited. Bonuses to tax-advantaged retirement and education accounts are tax-deferred until withdrawn. But bonuses are generally considered taxable income even if you can’t directly access the cash.
Do I get a tax form for the bonus?
If your brokerage bonus exceeds $600, you should receive a Form 1099-MISC reporting the amount as taxable income. This gets reported on your tax return. If no 1099 was issued, you still must report any taxable bonus as “Other Income”.
What if I refuse the bonus?
You’re free to decline a brokerage bonus offer when opening your account if you want to avoid the tax implications. Some brokerages give you the choice to opt in or opt out when eligible for a new account bonus.
Are bonuses taxed if I don’t meet the account requirements?
In most cases, failing to meet a minimum balance or other account conditions means you won’t receive the bonus at all. But if you already received the funds, you likely owe tax even if forced to return the bonus later.
Can I deduct brokerage fees and expenses against the bonus?
Unfortunately, you cannot directly offset the bonus income with any related brokerage account fees, commissions, or other expenses. The bonus is taxed as ordinary income.
Do I qualify for lower capital gains rates?
No, brokerage bonuses are considered ordinary income, not capital gains from selling investments. Your bonus will be taxed at your normal income tax rate, not the lower long-term capital gains tax rates.
The Bottom Line
Opening a new brokerage account can provide a quick cash infusion from bonus offers. But before jumping at the chance for free money, make sure you understand the tax implications. Bonuses to taxable investment accounts are always taxable income the year received. Tax-deferred accounts allow you to delay taxation until withdraw funds in retirement. With proper planning, you can reduce or eliminate the tax bite of a brokerage account bonus.