Is The Money I Make From Day Trading In Robinhood Taxed

It does non sound possible, merely we're not talking math or logic here, we're talking the tax code, and with the taxation code, "2 + 2" tin can sometimes equal "you're hosed."

How is this possible?

A little background get-go.

The example of the Robinhood trader, who hasn't been identified, was starting time highlighted in Morningstar by Alexandra Macqueen. She describes how Brian Wruk, a financial planner, received a text from the xxx-twelvemonth old investor who was facing an $800,000 tax pecker. 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 book per day, completing betwixt x and 50 trades daily, according to Morningstar.

The guy worked in insurance making $60,000 a twelvemonth and he traded $45 1000000 worth of securities last yr.

That's A LOT of volume, although the fact he managed to net $45,000 in gains is pretty impressive. He could just as easily accept lost $45,000. Or more.

Unfortunately, there'due south this thing called a "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 near the wash sale rules" wrote Wruk. "He booked a profit but was disallowed all the losses because he never once waited the thirty days on those stocks to book the loss," added Wruk.

What is the "wash sale rule?"

The launder-sale rule is an Internal Revenue Service (IRS) regulation that prevents a taxpayer from taking a tax deduction for a security sold in a wash sale. The dominion defines a wash sale as one that occurs when an individual sells or trades a security at a loss and, within thirty days before or subsequently this sale, buys a "substantially identical" stock or security, or acquires a contract or option to do so.

In short, if yous sell a stock at a loss and purchase that same stock (or something very much like information technology) back within xxx days you tin can't count that loss every bit a deduction against your gains that twelvemonth.

The intent of the rule was to prevent investors from selling securities solely to generate a loss for tax purposes. If you sell a stock for $100 that you bought for $120, so buy it right back for $100 the IRS considers that a "wash sale" in that nothing really changed as a result of the ii transactions ("it'due south a wash"), you lot only wanted to create a $20 loss. They don't let that unless you look 30 days first.

Why xxx days? Information technology'due south considered long enough that you lot have existent risk that the stock will take a large run while you're waiting to repurchase it only not so long as to exist punitive.

Sounds capricious? Welcome to the taxation code.

You will not be surprised to acquire that the IRS does not consider the reverse a wash sale, that is, if you sell a stock for a gain and and then purchase it correct back guess what? You nonetheless have to pay taxes on that gain in that year.

Have I said "welcome to the taxation code" already? I experience like I've said that already.

Y'all probably already encounter the kind of trouble a day trader could get himself into.

Trading in and out of stocks, 10 to l times a twenty-four hour period, y'all are going to book all kinds of pocket-sized gains and modest losses, in this person'southward case, maybe a few hundred on average. Every bit a wild guess, not knowing his verbal circumstances, we're talking close to $two million in both gains and losses with gains outpacing losses by the earlier mentioned $45,000.

The trouble is, the IRS but counts the gains, non the losses. Depending on his circumstances, he should be able to use those losses to raise his cost basis potentially saving him some taxes in the future, but that doesn't assistance him right now.

This is a really skilful instance of not knowing what you don't know. If y'all are a normal human existence who thinks in logical means, there really is no reason why a thing such as a wash auction would ever occur to you, which is why, no matter what, you should always do some inquiry into any new venture with which you have footling to no familiarity.

Source: https://notthebee.com/article/robinhood-day-trader-looking-at-800000-tax-bill-even-though-he-only-made-45000-trading-stocks-yes-this-can-really-happen

Posted by: semanwouspor.blogspot.com

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