[HN Gopher] Robinhood Trader May Face $800k Tax Bill
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Robinhood Trader May Face $800k Tax Bill
Author : rmason
Score : 39 points
Date : 2021-04-20 19:53 UTC (3 hours ago)
(HTM) web link (www.forbes.com)
(TXT) w3m dump (www.forbes.com)
| kevinpet wrote:
| It's utter bullshit to say he has that tax bill on a net profit
| of $45k. That's not how the wash sale rule works. The only way he
| could end up in that situation is if he ended the year holding
| positions with $2M in unrealized losses.
|
| Also, $1.4M in gains but $800K in taxes? Even California doesn't
| tax like that.
|
| I'm not sure if it's more charitable to assume the article is
| intentional lies for page views or finance reporters who know
| nothing about the industry they supposedly cover.
| DrAculaPHD wrote:
| It's FUD from Citadel trying to stir up mistrust in retail
| traders.
| vkou wrote:
| 1. You shouldn't have any trust in RobinHood to begin with -
| not because they behave illegally or maliciously, but because
| they often behave _incompetently_. If you 're going to day-
| trade, use a better exchange - one that's not ran like a
| circus.
|
| 2. The Citadel/Melvin/Reptilian wrecker, saboteur, and
| boogieman as the source of all unexplained events, price
| movements, and news is a ridiculous, unsubstantiated meme.
| mehlmao wrote:
| That seems completely unfounded. Citadel benefits from
| payment for order flow from retail traders. They do not gain
| by scaring them away.
| the-rc wrote:
| NYC? In NY state, once you hit the top bracket at 1.1M, it's a
| flat rate applied to all income, not a marginal rate. Then you
| have the 3.8% Obamacare surtax on investments.
| subsubzero wrote:
| These financial sites and their dumb tax bill scares. Its
| complete and utter nonsense. I remember after the gamestock share
| price run up there was scaremongering about enormous tax bills in
| cnbc and other sites like retail investors making a little money
| is so bad.
| whydoineedthis wrote:
| There is a "Wash sale" rule that prohibits writing off losses on
| stocks purchased within 31 days of their sale, but they don't
| apply to day traders.
|
| https://www.irs.gov/taxtopics/tc429
|
| He will need a good CPA to declare which assets were long term
| investments and which fall under mark-to-market day trading
| rules, but he won't need to pay $800k.
|
| tl;dr: clickbait (mostly), but do read up on the wash-sale rule
| if you intend on day trading in order to save yourself an end of
| year headache.
| EMM_386 wrote:
| > but they don't apply to day traders
|
| How does this work for bot trading? Is that considered day
| trading?
|
| Crypto bots are popular. When you trade cryptocurrency for
| another crypto, you are taxed on the value at which you sold it
| in USD, net the amount for which you purchased it in USD.
|
| Would this be done mark-to-market?
|
| I'd imagine a lot of traders thinking they can easily plug in
| the latest bot into their Binance account are in for a surprise
| when they see the size of the return they have to file.
|
| I'm only talking about the US regulation here.
| astrange wrote:
| Wash sale rules (the problem here) don't apply to crypto
| because it's considered property and wash sales only apply to
| "stocks and securities". You can definitely get into trouble
| if you do something like sell at a gain at the end of the
| year and instantly lose it all though.
| GloriousKoji wrote:
| Slight off topic but how does one find a good CPA when they
| don't have access to trusted referrals?
| duggable wrote:
| My understanding is that he can still count these losses
| towards the cost basis of the stocks, so it's not like the
| money is gone - just absorbed into the capital gains that will
| be calculated when he does sell. And if he had sold these >= 30
| days before the end of the year, he would have been able to
| claim the losses on this year's taxes.
|
| Edit: all that to say, I agree that it's clickbait.
| varispeed wrote:
| What this difference in tax aims to achieve? It seems like it
| is so complex it reminds me of parking meters with confusing
| signage designed to trap people not familiar with the area. Was
| that lobbied by existing traders to gatekeep their cake?
| toast0 wrote:
| Under (default) investor rules, you recognize income (or
| losses) only on sales or dividends (or taxable
| reorganizations), and can get long term capital gains, have a
| low limit on offsetting losses against ordinary income, can
| carry forward excess losses forever, and have the wash sale
| rule.
|
| Under trader rules, you must recognize gains (or losses) at
| the end of each year, and don't get capital gains rates, but
| you can offset income with losses all the way to $0, loss
| carryforward is time limited, but you can also carry back a
| few years.
|
| I'll keep my tax deferral and long term capital gains rates,
| thanks; but if I were a frequent trader, it seems like the
| alternate regime is simpler.
| marshray wrote:
| I've read 10 or 20 books on trading and investing and never
| heard it explained like this. Thanks.
| rmah wrote:
| The wash trade rule is to prevent people from taking a loss
| at the last day of the tax year to offset gains in other
| securities. Then re-buying it on the first day of the next
| tax year to "reset" the cost basis. In short, it's to prevent
| tax evasion shenanigans. Tax law is complex because people
| will spend a lot of effort to find loopholes. Closing these
| loopholes one after another creates the complexity.
| marshray wrote:
| But why shouldn't you be able to take your losses at the
| end of the year if you so choose?
|
| It makes no sense.
| varispeed wrote:
| How do you take a loss? Do you organise a press conference
| and then tell the media that the company you have shares of
| is bad? Wait for the shares to tank, sell. When the new tax
| year comes, buy all the shares and then organise press
| conference again to say sorry and it was just a prank?
| dcolkitt wrote:
| This is not correct. Wash sale rules apply unless you make a
| mark-to-market election in the prior year.
| whydoineedthis wrote:
| true about the mark-to-market specific election, it does need
| to be done the year prior and makes things for the following
| year earlier. He will still get out of the tax bill though
| through documentation.
|
| > A trader must keep detailed records to distinguish the
| securities held for investment from the securities in the
| trading business. The securities held for investment must be
| identified as such in the trader's records on the day he or
| she acquires them (for example, by holding them in a separate
| brokerage account).
| simplerman wrote:
| Except for the first year in business, you can make that
| selection at the tax time of current taxes.
|
| EDIT: I am wrong: https://www.optionstaxguy.com/mark-to-
| market
| fis wrote:
| How is it possible for the tax liability to exceed the profit?
| The article mentions wash sales, but it doesn't explain what
| sequence of such trades can cause this situation.
| fat_pikachu wrote:
| You buy security X for $1000 and sell it for $100. You
| immediately repurchase security X for $100 and sell it for
| $1100.
|
| You made a net profit of $100 but are taxed on $1000 because
| you can't write off the $900 loss.
| Schweigi wrote:
| This is not how it works under the wash sale rule. In your
| example, the $900 loss would be added to the cost base when
| doing the second purchase. Because of that, the sell at $1100
| will have a cost base of $1000.
| dcolkitt wrote:
| HFT trader here. I've commented on this story in another context,
| but I'm virtually certain there's an error with how Robinhood is
| calculating wash sale adjustments.
|
| First, it is true that you can't deduct a capital loss if you buy
| the security back in 30 days. _However_ that loss does rolll into
| an adjustment on the cost basis of the next trade you make in the
| security. So as long you have a net trading profit on the stock
| over the year, then you don't incur any additional tax liability.
|
| Really the only way to get screwed by the wash sale rule is if
| you're making a net loss on a specific security. This might be
| common in a high frequency pairs trading strategy. Say you make
| $10 million net profit trading stock A but lose $9 million
| trading stock B because you use it as a hedge. In this case you
| genuinely would be stuck with a $10 million tax liability despite
| only making $1 million in actual profit.
|
| However in this case, I really doubt that's what happened. The
| IRS rules on wash sales were written in a bygone era when high
| frequency trading didn't exist. The rules are very poorly worded
| and hard to interpret.
| toast0 wrote:
| As long as you don't make a wash sale between a purchase in an
| IRA (or maybe 401k) and a sale in taxable, the disallowed loss
| (as well as the holding period) is added to the cost basis of
| the replacement purchase.
|
| This delays recognizing the loss, and maybe you end up with a
| big gain in one year and a big loss in the next year, but you
| only really get screwed in the IRA case where the loss is
| disallowed in the taxable account and the basis isn't adjusted
| in the IRA; in that cass, the loss just evaporates.
| mattnewton wrote:
| > but I'm virtually certain there's an error with how Robinhood
| is calculating wash sale adjustments.
|
| Or, maybe it could be turbo tax importing the wrong info? IIRC
| they did not import the cost basis from employee purchase plan
| sales in my ETRADE account one year and treated it as a cost
| basis of 0. The trader in the article definitely needs to hire
| a CPA.
| [deleted]
| cj wrote:
| It boggles my mind that someone making 10-50 trades _per day_
| with a trading volume of $200,000 and $2 million _per day_ is
| doing so using Robinhood.
|
| Yes, Robinhood is an easy app to use.
|
| But at that volume, you really should be using a legitimate
| trading platform with fully built out functionality designed for
| people trading with that kind of volume.
|
| I want to blame Robinhood for this (and I think they should
| obviously fix issues such as selling shares on a First In First
| Out basis, which isn't always optimal for tax purposes) but I
| can't blame Robinhood fully for this.
|
| If you're going to play the game at a professional level it's
| kind of your responsibility to know the rules and to pick the
| right tools for the job. Robinhood is clearly not built for
| people trading millions of dollars per day.
| asdff wrote:
| Some use robinhood for trades but use other software for
| charts. It's convenient and fast enough.
| happytoexplain wrote:
| >a legitimate trading platform with fully built out
| functionality designed for people trading with that kind of
| volume
|
| Note that many people have no reason to believe that Robinhood
| does not match this description (even I only assume it doesn't,
| but that's only based on perception, not anything remotely
| objective - I can't trade in quantities above 3 or 4 digits, so
| I don't feel the need to invest my time in learning the
| differences between Robinhood and more "legitimate" platforms).
|
| Like you say, they do have a responsibility to _learn_ such
| things, once they are trading in such volume, but Robinhood
| also creates zero barrier to entry, and knowing what you don 't
| know is a real skill, and with those two facts, we do have to
| be thoughtful about precisely where we lay blame.
| cj wrote:
| > Note that many people have no reason to believe that
| Robinhood does not match this description
|
| I disagree with this. To me, it's like saying "I build
| websites using Squarespace WYSIWYG, but I'm unaware that
| there are a whole lot of engineers out there building
| websites with code."
|
| Anyone trading millions of dollars a day is aware of
| platforms like thinkorswim which alone shows how limited
| Robinhood is.
| [deleted]
| g123g wrote:
| If a user uses $1M of his own money to trade and make 100K in
| profit. Does he owe taxes on 100K or 1.1m?
| simplerman wrote:
| On $100K.
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(page generated 2021-04-20 23:02 UTC)