More than eight million people opened new brokerage accounts in the first three quarters of 2020. While the excitement of gaining huge stocks could have dampened the need for some during the epidemic, unforeseen tax consequences are now unfolding for new investors. In the event of a disturbance, a newcomer to Robinhood faces a $ 800,000 tax bill, despite only $ 45,000 in net profit. The individual earned $ 60,000 in his or her daily work. The example reinforces the ability to understand the tax implications of complex trading rules and certain strategies. More broadly, it should serve as a warning for a new crop of self-employed investors.

Robinhood Trader traded a total of $ 45 million with a net profit of $ 45,000

The case of the unsolved Robinhood seller was first covered Morningstar By Alexandra McCann. He describes how financial programmer Brian Uruk received a message from a 30-year-old investor who was expected to pay $ 800,000 in taxes. Like many, the insurance investor opened a new brokerage account in 2020 and quickly expanded his trading. According to him, he had a daily trading volume of 200,000 to 2 million US dollars, making 10 to 50 trades per day. Morningstar.

Wruk also shared the same joke on many forums, including the National Association of Personal Financial Advisers (NAPFA), which is posted On Twitter: In the post, Vruk describes the situation. “The young man called me and said that he had opened a $ 30,000 brokerage account. . . In 2020, he made a total of $ 45 million (yes, a million) deals with a net profit of $ 45,000 by the end of the year. He recently received his 1099-B ագրել to enter it in the Turbo Tax,: dissatisfied with the fact that he had a capital income of $ 1.4 million, a tax account of more than $ 800,000.

The investor stumbled upon the laundry rule

“This poor soul was behind all the famous stocks you see in the media all year round. . . [but] “He never knew anything about the rules of selling laundry,” Vruk wrote. “He made a profit, but did not allow all the losses, because he never waited 30 days for those shares to record a loss,” Vruk added.

The Laundry Sale Rule is an Internal Revenue Service (IRS) regulation that prohibits anyone from claiming a loss by selling or buying the same or similar securities at a loss within 30 days of the sale. Investors must wait at least 31 days before repurchasing the same investment to comply with the rule. “If people get out quickly, անուն out of names, և they incur losses, they have compensatory positions, they incur those losses within 30 days of the acquisition, those losses are stopped,” explained Aspiriant CEO Sandy Bragar. .

Retail investors now account for up to 25 percent of trading on peak days, according to Citadel’s O McCann. This is higher than 10% in 2019 արդյունք is the result of lower barriers to entry for random traders, including the strategy of many brokers to eliminate trading fees. Although the laundry rule is designed to prevent taxpayers from taking advantage of stock losses, it is easily ignored by many start-up investors. For so many new traders using platforms like Robinhood, the rule “can be a problem for beginners who have spent 2020 trading in just a few stocks. “Their investments may lose value, but they can not claim a loss with their 1,040 horses.”

Whether or not you can use the loss to recoup the profit in that year adds to the cost of your new investment. “In the long run, there may be a basis for higher costs. You can realize a bigger loss when you sell your new investment, or if you sell it as a growth, you can owe less for a profit, writes Fidelity. However, given that you can not reimburse the income earned in a particular year, you will still have to pay money to pay taxes. For a Robinhood investor, that means $ 800,000.

“Free” deals come at a price

Robinhood, one of the most popular investment programs և the pioneer of free crafts, has been in the spotlight several times over the past year. More recently, it has been the platform of choice for traders following Reddit’s WallStreetBets message board to raise the price of GameStop.

Its user experience has also been criticized. “Technology can make investing easy and fun. “It can also reduce the risk in ways that can mislead beginners,” wrote Wall Eason Weig, author of The Intelligent Investor column in The Wall Street Journal. “Robinhood can encourage risky behavior that can be reversed,” he added.

The blindness of the human rights bill is one thing, but Robinhood’s playful approach has also led to tragic consequences, as Alexander E. The case of Cairns. A 20-year-old student at the University of Nebraska has committed suicide after misinterpreting his account after seeing a negative $ 730,000 balance.

The Upshot:

Financial planner Vruk believes that ignorance of possible regulations “may be the next step in what awaits these DIY traders.” For new investors, it is important to consider the tax implications of trading to ensure that they do not comply with IRS regulations, including laundry rules. Ignoring these rules can be dangerous.