Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images
Trading memestonks on your phone is all fun and games — that is, until you get slapped with an $800k tax bill.
How? If inexperienced traders run afoul of the “wash sale rule,” taxes could outweigh gains.
A what sale?
A wash sale is when you sell a security at a loss, then buy it or a “substantially identical” security 30 days before or after the sale.
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The wash sale rule means you can’t take a tax deduction on that loss. It’s to stop people from using wash sales to increase tax benefits, but you can trigger it without even knowing it exists.
Here’s how it works:
- You buy 100 shares at $10/share for $1k
- Later, you sell them at $7/share for $700 — a loss of $300
- The next week, you repurchase them at $6/share for $600
Due to the wash sale rule, that loss is added to the cost basis, meaning your $600 repurchase becomes $900.
When you sell your shares again, your original loss is applied to the adjusted cost basis. That’s what you’ll use on your taxes.
So, how do you get an $800k tax bill?
That example’s an outlier, but the unidentified retail trader told financial advisor Brian Wruk he did it by going berserk on Robinhood, per Forbes.
The man opened a Robinhood account in 2020. He put up $30k, but Robinhood gave him $90k on margin. He then did 10 to 50 trades daily.
- Generated $45m (yep, million) in gross proceeds
- Profited by $45k
- Had $1.4m in capital gains tax
- And a potential tax bill of $800k+
“He booked a profit but was disallowed all the losses because he never once waited the 30 days on those stocks to book the loss,” Wruk said.
And short-term gains are taxed like ordinary income. Yikes.
The moral of the story: Let your stocks marinate at least 30 days, lest you become a cautionary tale!