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All Rights Reserved Sign In Subscribe BETA This is a BETA experience. You may opt-out by clicking here More From Forbes Apr 20, 2021,07:00am EDT Self-Employed In 2020? Make Sure You Consider This Valuable Tax Credit Apr 19, 2021,08:55pm EDT 2 Paths To Student Loan Cancellation Apr 19, 2021,04:25pm EDT 400,000 Borrowers May Qualify For Student Loan Forgiveness And Not Even Know It Apr 19, 2021,12:59pm EDT How To Negotiate A Better College Financial Aid Offer Apr 19, 2021,11:34am EDT Why $10,000 In Student Loan Forgiveness May Not Help Borrowers In Income-Based Repayment Apr 18, 2021,08:03pm EDT If $50,000 Of Student Loans Are Forgiven, This Is What Happens Apr 18, 2021,09:40am EDT Will Any U.S. President Help Michelle West Achieve Freedom Apr 17, 2021,07:10pm EDT The Ranks Of The Self-Employed Are Exploding Edit Story Mar 26, 2021,06:53pm EDT| Robinhood Trader May Face $800,000 Tax Bill Shahar Ziv Shahar Ziv Contributor Opinions expressed by Forbes Contributors are their own. Personal Finance I teach students and employees how to ace their personal finances. * Share to Facebook * Share to Twitter * Share to Linkedin Male Finance Freelancer Exhausted With Work A Robinhood newbie is facing a potential tax bill of $800,000 despite only making $45,000 in net ... [+] trading profits. The case should serve as a loud warning for the new crop of do-it-yourself investors. getty Over eight million people opened new brokerage accounts in the first three quarters of 2020. While the thrill of enormous stock gains may have provided a much needed distraction for some during the pandemic, unintended tax consequences are now manifesting for new investors. In one jaw-dropping case, a Robinhood newbie is facing a potential tax bill of $800,000 despite only making $45,000 in net trading profits; the individual also earned $60,000 at his day job. The example reinforces the importance of understanding complex trading rules and the tax implications of certain strategies. More broadly, it should serve as a loud warning for the new crop of do-it-yourself investors. Robinhood Trader Transacted $45 Million Total Trades With Net Profit of $45,000 The case of the Robinhood trader, who hasn't been identified, was first highlighted in Morningstar by Alexandra Macqueen. She describes how Brian Wruk, a financial planner, received a text from the 30-year old investor who was facing an $800,000 tax bill. Like many, the investor, who works full-time in insurance, opened a new brokerage account in 2020 and quickly scaled his trading. He had between $200,000 and $2 million in trading volume per day, completing between 10 and 50 trades daily, according to Morningstar. Wruk also appeared to share the same anecdote on multiple forums, including one for the National Association of Personal Financial Advisors (NAPFA), which was posted on Twitter. In the post, Wruk describes the situation. "Young man calls me and says he opened up a brokerage account with $30k. . . in 2020, he transacted $45M (yes, Million) in total trades for a net profit of $45,000 by year end. He recently received his 1099-B and input it into Turbo Tax and to his chagrin, he had $1.4M in capital gain income and a tax bill of just over $800k." Investor Tripped Up By Wash Sale Rule "This poor soul traded all of the popular stocks you see in the media consistently all year long. . . [but] he never knew anything about the wash sale rules" wrote Wruk. "He booked a profit but was disallowed all the losses because he never once waited the 30 days on those stocks to book the loss," added Wruk. The wash sale rule is an Internal Revenue Service (IRS) regulation that prohibits someone from claiming a loss by selling and purchasing either the same or similar securities within 30 days of the sale at a loss. To comply with the rule, investors must wait at least 31 days before repurchasing the same investment. "If people are going in and out of names quickly, and they're generating losses and have offsetting positions, they've generated those losses within 30 days of a purchase, those losses get suspended," explained Sandi Bragar, managing director at Aspiriant. MORE FROMFORBES ADVISOR Should You Invest In The Robinhood IPO? By Taylor Tepper Forbes Advisor Staff Retail investors now account for up to 25 percent of trades on peak days, according to Joe Mecane of Citadel. This is up from 10 percent in 2019 and is a result of lower barriers to entry for casual traders, including a strategy by many brokerages to eliminate trading fees. While the wash sale rule is meant to prevent taxpayers from taking advantage of stock losses, it is easily overlooked by many newbie investors. With so many more new traders using platforms like Robinhood, the rule "could pose a problem for novices who spent 2020 trading in and out of the same few stocks. Their investments may have lost value, but they won't be able to claim a loss on their 1040 form." While you can't use the loss to offset gains in a given year, the loss gets added to the cost basis of the new investment you made. "In the long run, there may be an upside to a higher cost basis--you may be able to realize a bigger loss when you sell your new investment or, if it goes up and you sell, you may owe less on the gain," writes Fidelity. However, given that you cannot offset a realized gain in a specific year, you would still need to cough up money to cover taxes; for the Robinhood investor, that means $800,000. "Free" Trades Come At A Price Robinhood, one of the most popular investing apps and a pioneer in free trades, has captured the limelight several times in the past year. Most recently, it was the platform of choice for traders following the WallStreetBets message board on Reddit to drive up the price of GameStop. Its user experience has also led to criticism. "Technology can make investing easy and fun. It can also downplay risk in ways that may lead novices astray," wrote Jason Zweig, author of The Intelligent Investor column at The Wall Street Journal. "Robinhood may encourage risky behaviors that could backfire," he added. Being blindsided by a humongous tax bill is one thing, but Robinhood's gamified approach has also led to tragic outcomes, like the case of Alexander E. Kearns. The 20-year-old student at the University of Nebraska died by suicide after misinterpreting his account and seeing a $730,000 negative balance. The Upshot Wruk, the financial planner, thinks ignorance of important regulations "may be the next way in what is to come with these DIY traders." For new investors, it pays to consider the tax consequences of trading and ensure they don't run afoul of IRS regulations, including the wash sale rule. Ignoring these rules can be perilous. Shahar Ziv Shahar Ziv Shahar is the founder of Acing Your Finances ( www.acingyourfinances.com), where he helps students and employees develop healthy financial habits. He co-founded a popular ... Read More Shahar is the founder of Acing Your Finances ( www.acingyourfinances.com), where he helps students and employees develop healthy financial habits. He co-founded a popular personal financial management course at Harvard University and has worked with students at Wharton, Columbia, NYU, and U Chicago as well as lawyers at Skadden and Debevoise, resident physicians at Mount Sinai Hospital, and employees at DoorDash. All opinions expressed are my own Read Less * Print * Reprints & Permissions [ ]