Page 20 - Investment Advisor May 2021

TAX TIME

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.

dvisor and accountant Dan
Herron got a large PDF from
A one of his clients via email
in 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 In his NAPFA post, Wruk explained “They’re not holding it for invest-
the often-overlooked side of investing: that a DIY trader he knows, but is not ment, so they’re not getting long-term
lengthy tax documents and potentially his client, recently put his 1099-B infor- capital gains treatment,” With a lot of
huge tax bills. mation into TurboTax and “to his cha- wash sales, they’re disallowing a lot of
The platforms “gamify [investing] to grin” had a $1.4 million in capital gains losses. People are ending up owing a
where people think it’s just fun, and and a tax bill of “just over $800k … he significant amount of money.“
they’re just trading paper money or never knew anything about the wash- Per IRS rules, investors can’t claim
whatever,” Herron said. “One of the sale rules.” (The investor traded on the losses if they sell and buy the same or very
scary things [DIY investors are] now TD Ameritrade platform.) similar securities within 30 days. “You
finding out is that, hey, 1099-Bs are real.” While the trader started out with can’t deduct losses from wash sales unless
Robinhood did not respond to $30,000 in his brokerage account, he the loss was incurred in the ordinary
requests for comment about the matter had some $45 million — “yes, million” — course of your business as a dealer in stock
as of press time. in total trades and a net profit of $45,000, or securities,” according to the tax agency.
Herron and other financial pro- Wruk explains in the post. By trading
fessionals have been exchanging on margin in 2020, the investor could MORE INVESTOR TROUBLES TO COME
their views about these situations on execute multiple trades that added up The investor Wruk knows and Herron’s
social media recently. Another exam- to between $200,000 and $2 million client are not anomalies, other advisors say.
ple, shared by advisor Brian Wruk of some days. “I would expect to see more of this
Transition Financial Advisors Group in “When it comes time to report those going forward,” said Jeffrey Levine, lead
Gilbert, Arizona, was posted to online trades on your tax return, you’re going financial planning nerd at Kitces.com
forums for members of the Financial to owe a ton of money — because what and chief planning officer at Buckingham
Planning Association and the National you’re seeing … is that it’s all short-term Wealth Partners, in an interview.
Association of Personal Financial gains,“ said Wruk in an interview with “The fact of the matter is that the Adobe Stock
Advisors; it later circulated on Twitter. Investment Advisor. rules are complicated and you don’t

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