Last year, Dayton Leong, an active trader with accounts at nine companies, made many trades using the Robinhood app. He liked the free stock he got from referring more than a dozen friends and found it easy to trade over the phone.
Recently, however, he stopped trading in his Robinhood account, which has about $ 238,000, mostly in Tesla shares. He says that one of the main reasons is taxes.
“Robinhood puts all the stock in one big bucket,” says Leong, 43, who lives in Berkeley Heights, N.J., and also works as a property manager. “I am concerned about my 2020 capital gains tax.”
SHARE YOUR THOUGHTS
Are you a trader who had a fiscal surprise this year? Tell us about it in the comments below.
With the 2020 tax accounts due, a wave of new retail traders are waking up to the fact that it can be difficult, and often impossible, to make tax reduction moves on new brokerage platforms like Robinhood, Webull, SoFi, Uphold and Public .com. Some do not allow trading in retirement accounts with tax incentives, such as IRAs. Traders may also find it difficult to track their “washing sales” that reduce tax benefits if they buy a stock within 30 days of selling the same stock at a loss.
The most irritating thing, for investors like Leong, is that, despite the sophisticated technology of the new platforms, they do not facilitate the implementation of a tax technique known as “specific lot identification”. Investors use it to reduce their taxes, sometimes significantly, by choosing which shares to sell if they have lots bought at different prices and are not selling all of them.
That is why this problem is important. Tax laws allow investors with taxable accounts to use the losses they incur when selling a stock that has fallen to offset taxes on gains from the sale of shares that have risen. Losses can also offset up to $ 3,000 in other income, such as salaries, each year. Unused losses carry forward for use against future gains and other income.
“Now that I have done a tax survey, I would like to be able to sell the stock I choose, not a stock selected by the ‘Sell’ button,” says Ashton Courson, 26, a construction worker and manager in Portland, Oregon. , with about $ 17,200 in a Robinhood account, he’s not using much, partly for tax reasons.
The option to sell specific lots is readily available at traditional brokerages. But Webull, SoFi, Public and Uphold don’t allow it, and Robinhood makes it difficult. This fact shocks professional financial managers.
“I think it is absurd. Taxes are a big component of investment returns and it is an area where investors have some control, ”says Bill Mulvahill, an accountant and money manager at Trailhead Planners in Minneapolis.
“It’s crazy – and it’s one of the reasons why Robinhood has been a blessing to my business this year,” adds Kevin Kleinman, a financial advisor at Blue Haven Capital in Geneva, Illinois. Mr. Kleinman said he has more than 10 new customers dissatisfied with Robinhood, and all have had tax complaints, including Mr. Leong.
Intelligent use of specific lot identification can minimize current tax accounts. Let’s say a dealer owns Tesla shares bought at $ 400, $ 650 and $ 850 each since mid-September 2020. If that person decided to sell some of the winners at a recent price of $ 675, the taxable gain would be $ 275 or $ 25 per share, depending on which shares were sold. That is a big difference – and it is even bigger if about $ 850 shares were sold, bringing in a loss of $ 175 per share that could offset taxable earnings.
Any of these fiscal results can make sense: an investor with losses elsewhere in a portfolio may want to make gains, and another with gains may want to assume losses. But many of the new trading platforms make this difficult or impossible to do.
At Robinhood’s tax lots web page, the company does not inform customers that they have the option to sell specific lots. Instead, he claims that sales will be made first in, first out, known as PEPS, in which the oldest shares are sold first. Although PEPS can lower tax rates if older shares are held for more than a year, it may not be. In the Tesla example above, the FIFO would conceivably give the dealer the worst result – a short-term gain of $ 275 per share, taxed on ordinary income rates, such as wages.
In the fine print of trading confirmations sent to customers after they sold the shares, Robinhood offers the option of specifying lots. But the process is complicated.
Robinhood customers cannot specify much at the time of sale, as they usually do with traditional brokers. Instead, they research your history and email customer service with six data points, including dates and prices, before the transaction is completed two days after the transaction date. Each request receives a case number and is dealt with individually.
A spokeswoman for Robinhood said she normally tries to tell customers if their order was successful in seven days, but the tax season rush has temporarily expanded the wait to up to 30 days. Due to the high volume of inquiries, customers are also asked to send an email to find out the status of the request to ensure that they will receive the information as quickly as possible.
Leong says he finds the process so daunting that he never used it: “It takes a lot of work to dig through my order history to find lots and then wait for them to approve the sale.” In another account at a traditional brokerage, he says, his specific lot history appears while he is selling shares, and he can easily select which ones he wants to sell.
Mulvahill, who has experience selling lots online at five different traditional companies, says that at these companies lots can usually be chosen and sold with just a few clicks.
A spokeswoman for Robinhood says she is always looking for ways to improve the customer experience, but she has nothing to share at the moment about changes in the specific batch identification process.
Help with the tax season
Download your copy The Wall Street Journal’s 2021 tax guide e-book. (Free for subscribers)
Other new platforms do not allow specific batch IDs at all. Both Webull and Public require FIFO for sales, while Uphold sells the most expensive shares available (called the largest from the first out, or HIFO), and SoFi orders lots so that losers are usually sold before the winners.
Anthony Denier, CEO of Webull says he is “looking to add more customization,” and a spokeswoman for Public said the company is “studying options to minimize taxes”. A SoFi spokesman said that detailing fiscal lots is “on the roadmap for future releases”. Josh Greenwald, head of trading at Uphold, says the company will consider making changes to tax offerings as it expands.
What difference does tax management make to financial results? According to a recent study, systematically taking losses that reduced taxable earnings increased returns after tax by an average of 0.82% per year from 1926 to 2018 for an investor in a 35% tax range. The gains may be greater in some circumstances, says one of the study’s authors, Terence Burnham of Chapman University, as if an investor were trading small or volatile stocks or selling them short.
Dan Herron, an accountant in San Luis Obispo, California, who just prepared a return for a client who did more than 10,000 deals at Robinhood last year, says: “I tell clients who negotiate to specify lots when they sell, or they could be laundered in taxes. ”
Write to Laura Saunders on email@example.com
Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8