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Using Robinhood Could Cost You Thousands In Taxes, Here’s Why

    • 88 posts
    May 2, 2021 10:01 AM +0430

    Using Robinhood Could Cost You Thousands In Taxes, Here’s Why

    With tax filing season in full swing, many new do-it-yourself investors are dealing with complicated tax issues for the first time. Some are getting caught up in complex IRS policies, like the wash-sale rule, and are now on the hook for hundreds of thousands of dollars. Those who are using new platforms, like Robinhood, are also hamstrung by the lack of critical functionality that helps minimize taxes. These gaps, or the manual band-aid solutions that Robinhood has deployed, could cost new investors thousands in additional taxes. Here’s why.

    Robinhood Doesn’t Allow For Automated Tax-Minimizing Strategy

    Despite its many bells and whistles, Robinhood makes it extremely difficult for investors to use a tax-strategy known as “specific-lot identification.” As was first reported by The Wall Street Journal, this technique allows investors to reduce their tax bill by specifying what shares to sell, which is especially critical if they bought shares at different times and at different prices. pg

    Selling specific lots allows an investor to smooth out returns and potentially offset other gains or losses. The IRS allows investors to offset up to $3,000 of other income with stock losses and then carry over any additional capital losses to offset future income. The Wall Street Journal used an example of a trader with Tesla shares to show how strategically deploying specific-lot identification could make a significant difference in the end of year tax bills.

    Assume an investor has three Tesla shares that were bought at $400, $650, and $850 in the middle of last year. If the trader wanted to sell a single share at the current price of roughly $700, the taxable amount could swing from a huge gain to a loss depending on which share was sold. Specifically, the trader may have a $300 capital gain if she sold the share bought at $400 and a $150 capital loss if she sold the $850 share.

    • 5 posts
    May 2, 2021 9:14 PM +0430

    thank you posting.