Submitted by Unlucky-Prize t3_zuymqy in wallstreetbets
Every year, around March or April, someone here posts that they owe an incredible amount of taxes and can’t afford it. Then there’s stories like this guy who made 45k in profit but owed 800k in tax.
https://www.forbes.com/sites/shaharziv/2021/03/26/robinhood-trader-may-face-800000-tax-bill/amp/
I have a friend who made millions in 2020, lost 40% by the time he paid tax in 2021, and after tax, had very little capital left - and a multi-million tax loss shield he can’t use.
Tldr: ignore taxes if you like, just understand they happen whether or not you care about them.
Whether or not this is a thing for you is going to depend on if you a) made money and some point and/or b) kept trading the same security over and over with no long gaps and that’s a loss, but you had a gain elsewhere.
Anyway, for all of the above bad outcomes, there are simple steps you can take so long as you do them immediately the day the market opens next week.
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realize your losses and do it as soon as the market opens so you get settlement before year end. That means Tuesday for most markets. And don’t rebuy that stock or a derivative of it for 31 days. This allows you to apply the loss against your gains for 2022. If you do it in 2023, it’ll only apply to 2023 and after, and a large loss shield but large taxes due is awful. You can only use loss shield quickly if you have a lot of new gains. As a best practice, fully exit positions to avoid the buy-before side of the wash sale (see note 1). The downside is if the stock rallies you will miss out. But a large and certain tax benefit may be worth an uncertain gain over a 1 month period. You’ll need to figure that out for yourself as to if it’s worth it to you. Note: consensus is settlement gives you recognition for short covering and trade date for most others, but I personally just err on the side of caution and do these early.
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check for wash sale issues. If you’ve been day trading a meme stock constantly, any shares have a good chance of being loaded up with losses if it’s been at a net loss. But if you made a lot of money on something else, and lost a lot on that stock, you won’t get a loss to offset those other gains unless you sell it and stay sold out for 31 days.
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set aside money for your taxes or just pay them now. In my friends case, he’s definitely a degenerate gambler and knew he had those taxes due but gambled the money anyway. He really wishes he didn’t now.
I hope this helps some people avoid a nasty surprise. Your trading platform should be able to give some insight.
And yes, if you actually never made money you are fine. But this wash sale issue is tricky and can leave you in a bad spot where you think you realized a loss but didn’t. So, definitely hands off any stock (or option of it) you realize this week for the next month - come back in 32 days (or February)
If you want to Google further info, would search ‘tax loss harvesting’. Note that this post is specifically about US capital gains taxes in taxable accounts, not ira accounts. The rules may differ a little or a lot in other countries.
Disclaimer: I am not a cpa or other licensed tax advisor but can speak in generalities if you have questions. This is not tax advice because I am not a tax advisor, I’m just a random person on the internet, and because I also do not know your individualized situation in depth and that is a key input to any tax advice. If I answer a question, it’s still not tax advice because I won’t know the full picture and I’m not a tax profession. Ultimately, you should seek advice from a pro if you feel you may need it. And if you are asking questions on a thread like this, you probably do need it.
Note 1: my understanding which may be wrong is if you fully exit you avoid the consequences of pre buying to then sell the portion you have a loss on. You don’t have to fully exit, but it’s easier to get wrong if you don’t. If you aren’t sure, good time to ask a professional. But a clean full exit should allow a clean realize provided you hold off on a rebuy. The reason is that if not for the buy before rule, people would just buy 100 shares then moments later sell the 100 shares they are underwater - basically the same thing as selling 100 shares then immediately buying 100. Both are wash sale if loss realized. So, fully exiting the position and staying away should resolve this issue, I think. You can do a partial exit but be sure you know what you are doing. Seek help if you aren’t sure.
Note 2: crypto supposedly doesn’t have wash sale. But I’m not certain on that so really do your own research - for those you’d just sell and buy real fast if that’s true. Section 1256 contracts (spx, ndx, rut, es, nq, commodity futures, certain crypto futures, etc) mark to market dec 31 anyway, so realizing doesn’t matter, but setting aside money for taxes still does.
Note 3: true, you can elect trader status to be on a different rule set that has less issues like this but in general higher taxes (just can carry forward losses better and mix with other income) but that requires this is basically a full time job, and you are probably in ‘get a cpa land even if you think you got it’ there. This won’t apply to 99.99% of wsb traders.