Stock Trading Platforms Offer Limited Tax-Minimization Strategies
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Here's your money briefing for Monday, April 19th. I'm J.R. Whelan for The Wall Street Journal. On nearly all traditional stock trading platforms, investors can select which shares they want to sell as part of a strategy to manage their tax liability. That's not always the case on the newer wave of online platforms that are geared toward younger investors.
You know, these apps are so easy to use and they've brought so many people in, but they're not making the tax part of it easy as well. And I think that people need to pay attention.
Coming up, our tax reporter Laura Saunders will discuss the limitations that come with easy trading and what that could mean for your taxes. And we'll hear from one trader who made a lot of money in the market last year, but now has nightmares because of his tax bill. Literally.
How are newer trading apps limiting investors' ability to manage taxes?
That's after the break.
We've talked on the show before about the surprise tax bill that can come from frequent stock trading, and we've discussed some ways professional investors can minimize what they owe. But many young investors using new trading platforms don't have those options. So what can they do about it? We'll hear directly from one of them in a moment, but first our tax reporter Laura Saunders is here to discuss. Laura, thanks for being here.
Thanks so much for having me.
You know, Laura, a lot of these newer platforms make it really easy to buy and sell stock, but they don't make it so easy to take steps to minimize your tax burden. Tell me about what you found.
Well, yes, I think it's important for people to pay attention to that. You know, the last year has brought a flood of new investors into the markets in taxable accounts. And now the taxes are starting to come due and they're waking up to issues that they maybe didn't know they had. For instance, a lot of these platforms, particularly Robinhood, don't allow you to trade inside of an IRA account. When you're trading in an IRA, you don't have to pay taxes. You have to pay taxes at the end when you take the money out. But there are not a lot of tax problems along the way. Now, if you're trading in a taxable account, every single cell is going to be what they call a taxable event. You could have a gain or a loss or this, but there's just a lot of complicated stuff to learn.
And the other thing is you can't do that. And often... They don't make it easy to know if you've had wash sales. That's when you buy and sell real fast and you don't get to use your losses because you bought again real fast and things like that. So these are things for people to start to be aware of.
So this highlights a strategy that's called specific lot identification. Can you say what that is and how it works?
You know, these apps are so easy to use and they've brought so many people in, but they're not making the tax part of it easy as well. And I think that people need to pay attention. Specific lot ID has to do with when you sell a stock and you're not selling the whole entire stock. Maybe you bought Tesla or GameStop three or four times at different prices. Well, every time you sell, there's going to be a gain or a loss and depending on what you bought and when you bought it, you could manage your taxes. So you have a smaller gain or you have a larger loss. Now, any of those things could be okay and they could work pretty well, but you have to be aware of all of your positions, where you stand, what your taxes are, and then you want to be able easily to say, I want to sell this one.
not that one. And that's what the five platforms we looked at. Four don't allow specific lots to be sold at all. And the fifth one, which is Robinhood, makes it really, really hard and really doesn't tell you about it.
Now, there's no requirement for the trading platforms to offer that as an option. So what method do they use to determine which shares to sell instead?
They all have different methods they use. One is FIFO, first in, first out. That's very common. Another one could be LIFO, last in, first out. Or HIFO, highest in, first out. The point here is that there's really no choice.
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