Robinhood daytrader owes 800K to IRS on a profit of 45K

[Snuskpelle]

So after reading about this, my impression as a Swede is that the US wash sale rule is bad and that it frankly would make more sense to encourage wash sales. When you are reducing your taxes by exiting a losing position, you're not doing it because it's fun, you're doing it because you at that point have an actual loss and it doesn't make sense to be taxed as much on gains. The rule seems grounded in the erroneous belief that an unrealized loss isn't a loss and that magically you will be back into green soon.

Am I right here or did I miss something?

 

[guru]

you at that point have an actual loss

But what’s an “actual” loss: one that you want to take due to temporary drawdown, or one that actually happened due to exiting positions? What if you hold SPY for 30 years and when sometimes it’s down by December then you could decide to sell it for a day to take a loss, then buy it back the next day. Should you then be able to be taxed differently from everyone else who holds SPY long-term and didn’t take such temporary loss? Maybe, but since we’re not allowed to use unrealized gains or losses, then everyone gets treated equally.

The US also has two different tax rates: for short-term gains vs long-term gains. And people would definitely like to use losses on one to offset gains on the other, and vice-versa, but we’re not allowed to do so, so again, the system is designed to prevent manipulation and turning long-term investment into short-term whenever you feel like it, or vice-versa because long-term gains are taxed lower.
In the end this provides equal treatment and doesn’t allow smarter and richer people who utilize tax lawyers and advisors to cheat the system while everyone else simply invests and follows basic rules and tax code.
It’s possible that too many people were using various tricks to adjust their gains vs losses however they liked, so the IRS closed such loopholes.
Though of course the basis for all this is the tax code/rules that may be different in the US than other countries.

 

[terr]

What if you hold SPY for 30 years and when sometimes it’s down by December then you could decide to sell it for a day to take a loss, then buy it back the next day.

??? If you held SPY for 30 years, you're hugely up. You can't take a loss if it is down for one month. Your loss from is from the cost basis, which would be the 30-years-ago cost basis, and then it is not a loss.

 

[guru]

??? If you held SPY for 30 years, you're hugely up. You can't take a loss if it is down for one month. Your loss from is from the cost basis, which would be the 30-years-ago cost basis, and then it is not a loss.

Ok, then take any other stock. It’s just an example. Or imagine holding SPY your first year when it may lose value temporarily.

 

[terr]

Ok, then take any other stock. It’s just an example. Or imagine holding SPY your first year when it may lose value temporarily.

Ok. You buy stock at $100. At end of the year it drops to $90. You want to realize the loss. So you sell. You realize loss of $10. You immediately buy. Your basis is now $90. Going forward your gains will be higher (if there are any) and so will your taxes.

What exactly is the problem here?

 

[ajacobson]

Textbook Wash Sale - you would have to add the $10 to the basis of your new purchase.

https://www.schwab.com/resource-center/insights/content/a-primer-on-wash-sales

 

[terr]

Textbook Wash Sale - you would have to add the $10 to the basis of your new purchase.

https://www.schwab.com/resource-center/insights/content/a-primer-on-wash-sales

I understand that it is. But my question is - what is the problem with actually allowing the tax loss in that situation?

 

[ajacobson]

Professional traders and MM never paid tax - they just rolled stuff forward. Part of the reason the mixed straddle rule and 1256 were created. Option MMs lived pretty much in a tax free world until the change. Many were actually driven out of business from the tax bill change.

 

[BMK]

Option MMs lived pretty much in a tax free world until the change.

The wash sale rules do not apply to a dealer in stock or securities.

Under the current rules, market makers do not "live in a tax free world." However, they are not subject to the wash sale rules. Their positions are marked to market at the end of the year. This effectively means that they use unrealized gains and losses, as of the last day of the year, for tax purposes. Of course, they also report realized gains and losses. But they are not subject to the wash sale rules.

The idea that the wash sale rule was somehow implemented because market makers were not paying taxes does not make sense, because the wash sale rules are not applicable to market markers.

what is the problem with actually allowing the tax loss in that situation?

The IRS view is that it's not a real loss because you bought the stock again too soon. As I have previously noted, the time frame of 30 days is arbitrary. Some legislative committee, or some team of tax lawyers who work for the IRS, decided 30 days was good way to define an "artificial loss" that does not really count for tax purposes. What if you sell the stock at a loss and buy it back four minutes later? What about eighteen seconds later?

Would you be willing to concede that at some point, the taxpayer is engaged in a transaction that has no economic substance, that his or her intent is not to sell the stock, and that the sole purpose of the transaction is to claim a loss for tax purposes?

Based on some earlier comments you made in this theread, it sounds like you are arguing that taxpayers should be allowed to use an unrealized loss to reduce their taxable income. But if that was allowed, would you require that same taxpayer to report unrealized gains as income as of the last day of the year?

You can't have it both ways. You can't use unrealized losses to reduce your income while not including unrealized gains. The treatment has to be consistent.

BMK

 

[terr]

Would you be willing to concede that at some point, the taxpayer is engaged in a transaction that has no economic substance, that his or her intent is not to sell the stock, and that the sole purpose of the transaction is to claim a loss for tax purposes?

Yes I would agree. What exactly is the problem with that? You claim the loss, you buy at lower basis than before, eventually if you sell with a gain, you will pay a higher tax. It works out for the government in the end. What is the problem?