Wash sale rules and modern traders

[i_have_so_much_to_learn]

I wanted to present some analysis and post able question on this article that I recently read: https://www.forbes.com/sites/shaharziv/2021/03/26/robinhood-trader-may-face-800000-tax-bill/

The short version is: a newfound "investor" made an incredible $ 45,000 return, didn't know about the wash sale rule, and rou d himself owing 800k in taxes.

I've recently been involved in a number of mentorship opportunities for teenagers and I've found that (generalizing) modern kids are brave, opinionated, confident, and generally flippant and ignorant about rules. This worked fine in the past before internet, because they couldn't go out and do any real damage without their parents.

These kids are now logging into their parents trading accounts, or getting their own custodial accounts, and I personally saw one trade $1000 probably 50 times day trading (using a cash account, no pattern day trading reactions), and take losses without realizing they can't be written off because he buys them back seconds later.

What do we do to help inform people about the law? Do we force people to take a class before trading summarizing the rules and dangers?

Am I officially old for thinking this way? :)

[Sultan58]

wash sale rules aren't as onerous as many believe.....I've day traded pretty heavy for a long long time thru Ameritrade....never got dinged for wash sales.  It helps to be designated as a mark to market account as well.

Cost basis is what matters.

I read it and I don't believe that article is necessarily correct based on my experience.....or the trader involved went to a tax preparer who didn't know what they were doing.

[JohnnyZ]

So I' m not going to be very helpful because, though I had heard the "wash sale rule" being mentioned I had no idea what that entailed until now; this article highlights the difference in regulations between the US and other countries. At any rate the onus is on people to know the tax consequences of what they do; I feel for the guy who gets that huge tax bill, but if I'm going to trade up to $2 millions a day while making $60k with my regular job you better believe I'll get informed about tax regulations beforehand.
 Here in France we just add the profits for the past year, minus the losses and trade fees, and that's what we write down in the tax declaration. You can only get taxed up to 30% on this even if you're wealthy, and as of a few years ago there's no tax difference between capital gains on something you've held for a year or something you trade 10 times a day.
 I find it astonishing that the US of all countries has less beneficial financial tax regulations than my own :)

[MustacheAndaHalf]

Here in France we just add the profits for the past year, minus the losses and trade fees, and that's what we write down in the tax declaration. You can only get taxed up to 30% on this even if you're wealthy, and as of a few years ago there's no tax difference between capital gains on something you've held for a year or something you trade 10 times a day.
I find it astonishing that the US of all countries has less beneficial financial tax regulations than my own :)

You mean paying 30% on capital gains in France is better than paying 15% on capital gains in the U.S.?  I'm not sure I follow.
https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates

[JohnnyZ]

You mean paying 30% on capital gains in France is better than paying 15% on capital gains in the U.S.?  I'm not sure I follow.
https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates

I should have been more accurate, I meant that our taxman is a bit friendlier with capital gains as opposed to money you get from actually working, which with the wash sale rule doesn't seem to be the case in the US unless you buy and hold for a long time (I'm not that familiar with your tax brackets so that may be an erroneous assumption). On the whole we are taxed more here, in part because of our national pension scheme and social security.
- 30% may seem high to you but our 30% tax bracket starts at about $31k in income, and income above about $182k that comes from your work is taxed at 45% - not so for capital gain, you can cap it at 30%, so that benefits traders
- there's no benefit to buying and holding, capital gains are taxed the same whether you've held the stock for 10 minutes or 2 years, also benefits day traders

[ChpBstrd]

Here in France we just add the profits for the past year, minus the losses and trade fees, and that's what we write down in the tax declaration. You can only get taxed up to 30% on this even if you're wealthy, and as of a few years ago there's no tax difference between capital gains on something you've held for a year or something you trade 10 times a day.
I find it astonishing that the US of all countries has less beneficial financial tax regulations than my own :)

You mean paying 30% on capital gains in France is better than paying 15% on capital gains in the U.S.?  I'm not sure I follow.
https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates

15% is the long-term capital gains rate in the U.S. - for now. One's short-term capital gains could be taxed at up to 37% depending on income. If a high-income person with lots of short-term gains switched to French citizenship and took their assets with them, they could sell in France and pay lower taxes than in the U.S. (30% instead of 37%).

In terms of the OP's question, a pop-up warning could be triggered before a person enters a buy order which would note that this trade will disallow capital losses from a previous trade. The programmers have already built more complicated algos than this.

[bacchi]

You don't actually lose the capital loss in a wash sale. It just gets pushed forward and added to the cost basis.

[JohnnyZ]

In terms of the OP's question, a pop-up warning could be triggered before a person enters a buy order which would note that this trade will disallow capital losses from a previous trade. The programmers have already built more complicated algos than this.

 That seems the best answer to the problem.
Another option if they don't want to mess with their algos: my broker has different types of accounts, you start on "basic" and if you want to unlock the fancy stuff like options you have to take a quizz; they could do something like that about tax regulations etc. before you can trade.

[MustacheAndaHalf]

... which with the wash sale rule doesn't seem to be the case in the US unless you buy and hold for a long time (I'm not that familiar with your tax brackets so that may be an erroneous assumption)

If someone might trigger a wash sale, they can just wait 30 days.

The lower long-term capital gains tax encourages investment, and you have to admit it's worked - when you add up the market cap of U.S. stocks, it's more than the rest of the world combined.  (For example "Vanguard Total World" holds 55% U.S. stocks)

[ZaraThustra]

wash sale rules aren't as onerous as many believe.....I've day traded pretty heavy for a long long time thru Ameritrade....never got dinged for wash sales.  It helps to be designated as a mark to market account as well.

Cost basis is what matters.

I read it and I don't believe that article is necessarily correct based on my experience.....or the trader involved went to a tax preparer who didn't know what they were doing.

Ditto -- it's NOT a wash loss "penalty" -- it's a wash loss "disallowed" per IRS. Agreed - the article in OP is misleading. When the last purchased shares' cost basis is increased by the loss generated by the original sale(s), it's just that -- a wash.

https://www.investopedia.com/terms/w/washsalerule.asp

Just wait until zoomers start getting K-1s after chasing those super attractive yields on listed royalty trusts. Another headache that isn't actually a headache.