The Tax Implications of Day Trading
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What is the main topic discussed in this episode?
Here's your money briefing for Monday, September 14th. I'm J.R. Whalen for The Wall Street Journal. Trading stocks from your computer or your phone, often called day trading, isn't new. But with so many people stuck at home with little else to do, millions more are putting on their investor cap. That's made day trading one of the year's biggest market stories. And sure, you might be able to make some quick cash, but watch out for the tax bill that comes with those trades.
Individual investors have gone from 14% to 20% of the market, but there may be some rude shocks when tax season comes.
Our tax reporter Laura Saunders will talk about how day traders can keep their tax bill in check. That's after the break.
How has the rise of app-based day trading changed who participates in the market?
Apps like Robinhood and online retail trading companies make it easy for people to buy and sell stocks. And with some luck, maybe pick up some quick cash. But many day traders aren't aware that Uncle Sam is waiting right around the corner for his cut. Our tax reporter Laura Saunders is here to explain the tax implications of day trading.
When are trades taxable and what makes each sale a taxable event?
So, OK, Laura, tell us how this works. Do people get taxed every time they sell a stock?
A lot of the day trading that's going on right now is happening in so-called taxable accounts. And every time you sell, there could be a gain or a loss. And at the end of the year, you might get 20 or 30 pages of listings of this for the IRS. It's every one of those sales is what we call a taxable event. You could have either a gain that's taxed or a loss that is subtracted from your gains. So it gets pretty complicated pretty fast.
So a lot of people go in and out of the stock market almost on a daily basis. They see the stock go up and they sell and then they go and they buy another one. And it seems like the IRS is just waiting on the other side with a cash register.
Yes, that's true. It's really Congress. Congress makes these laws, but at the end of the year, you're going to get a document that has all the trades in it. If they're options trades, it's even more complicated, but people should really pay attention to their taxes. Now, it's not like that if you're trading inside of an IRA or another retirement account like a 401k or a Roth IRA. They have different rules. You don't owe taxes on those trades.
Why don't retirement accounts like IRAs trigger taxes on trades?
But say Robinhood is a very popular app right now. They don't allow trading within your IRA. You have to have a taxable account. And I think a lot of people are going to be surprised when tax time rolls around next year.
You know, trading stocks isn't always for the faint of heart. But some apps like Robinhood, like you mentioned, and investment houses have made it pretty easy and tempting to buy and sell.
They make it so easy to use. Like Robinhood, people say again and again how even if you don't know anything, they'll bring you right into it. Robinhood has, they have confetti when you make certain kinds of trades. It sort of comes down over the screen and a big button for a certain kind of buy and a little button for a certain kind of cancel order. And so it's the other websites look kind of stodgy in comparison. And sometimes they almost seem like Netflix or Amazon that they tell you what other people are buying or other people are selling. And they make suggestions and they give you free shares and things like that. It's a different user experience from the traditional sites like Fidelity or Schwab.
And of course, all the trades are no commissions, no commission trades. The traditional brokers like Fidelity and Schwab do this now too.
How do holding periods affect short-term vs long-term capital gains tax rates?
So that encourages trading all over the markets that you can go into Schwab or Fidelity and have no commissions and a lot of trades. So this is all ginning up trading for everybody.
And then there's a woman from New Jersey that you spoke with who likes to trade online. She got a bit of a shock in her mailbox recently.
She was a student and she wanted to be an investor and she started buying and selling and she got a 12-page document her first year. And she couldn't understand it, it didn't make any sense, but she really has learned and she has learned that she really likes to hold things for longer than a year so that the tax rate is lower.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:05–0:52
2
How has the rise of app-based day trading changed who participates in the market?
0:52–1:10
3
When are trades taxable and what makes each sale a taxable event?
1:10–2:25
4
Why don't retirement accounts like IRAs trigger taxes on trades?
2:25–3:39
5
How do holding periods affect short-term vs long-term capital gains tax rates?
3:39–5:19
6
What data shows how many new and first-time investors joined Robinhood in 2020?
5:19–8:33
7
How can investors pick which lots or time sales to reduce their tax bill?
8:33–8:45
Speakers
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