Advisor and accountant Dan Herron got a large PDF from one of his clients via emailin March.
“It’s from Robinhood, which is pretty
common these days,” said Herron, who
leads Elemental Wealth Advisors in San
Luis Obispo, California. “But when I
opened it, I was like, ‘Holy —-!’ Pardon
my language. There’s 500-plus pages
[to the 1099-B tax form], and … a lot
of transactions, a lot of volume, from
options trades to individual stock com-
missions to ETFs.”
This tax season, advisors say inves-
tors who traded on Robinhood and other
do-it-yourself investment platforms last
year are now getting a big shock from
the often-overlooked side of investing:
lengthy tax documents and potentially
huge tax bills.
The platforms “gamify [investing] towhere people think it’s just fun, andthey’re just trading paper money orwhatever,” Herron said. “One of thescary things [DIY investors are] nowfinding out is that, hey, 1099-Bs are real.”Robinhood did not respond torequests for comment about the matteras of press time.
Herron and other financial professionals have been exchangingtheir views about these situations onsocial media recently. Another example, shared by advisor Brian Wruk ofTransition Financial Advisors Group inGilbert, Arizona, was posted to onlineforums for members of the FinancialPlanning Association and the NationalAssociation of Personal FinancialAdvisors; it later circulated on Twitter.
In his NAPFA post, Wruk explainedthat a DIY trader he knows, but is nothis client, recently put his 1099-B information into Turbo Tax and “to his chagrin” had a $1.4 million in capital gainsand a tax bill of “just over $800k … henever knew anything about the wash-sale rules.” (The investor traded on theTD Ameritrade platform.)
While the trader started out with$30,000 in his brokerage account, hehad some $45 million — “yes, million” —in total trades and a net profit of $45,000,Wruk explains in the post. By tradingon margin in 2020, the investor couldexecute multiple trades that added upto between $200,000 and $2 millionsome days.
“When it comes time to report thosetrades on your tax return, you’re goingto owe a ton of money — because whatyou’re seeing … is that it’s all short-termgains,“ said Wruk in an interview with
“They’re not holding it for invest-
ment, so they’re not getting long-term
capital gains treatment,” With a lot of
wash sales, they’re disallowing a lot of
losses. People are ending up owing a
significant amount of money.“
Per IRS rules, investors can’t claim
losses if they sell and buy the same or very
similar securities within 30 days. “You
can’t deduct losses from wash sales unless
the loss was incurred in the ordinary
course of your business as a dealer in stock
or securities,” according to the tax agency.
MORE INVESTOR TROUBLES TO COMEThe investor Wruk knows and Herron’sclient are not anomalies, other advisors say.
“I would expect to see more of thisgoing forward,” said Jeffrey Levine, leadfinancial planning nerd at Kitces.comand chief planning officer at BuckinghamWealth Partners, in an interview.
“The fact of the matter is that therules are complicated and you don’t
By Janet Levaux
The 6-Figure Wash Sale Tax Nightmare and
Other DIY Investor Horror Stories
The rude tax-time awakening of legions of novice day traders has become
a hot topic among advisors.