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HFT trader here. I’ve commented on this story in another context, but I’m virtually certain there’s an error with how Robinhood is calculating wash sale adjustm

HFT trader here. I’ve commented on this story in another context, but I’m virtually certain there’s an error with how Robinhood is calculating wash sale adjustments. First, it is true that you can’t deduct a capital loss if you buy the security back in 30 days. However that loss does rolll into an adjustment on the cost basis of the next trade you make in the security. So as long you have a net trading profit on the stock over the year, then you don’t incur any additional tax liability. Really the only way to get screwed by the wash sale rule is if you’re making a net loss on a specific security. This might be common in a high frequency pairs trading strategy. Say you make $10 million net profit trading stock A but lose $9 million trading stock B because you use it as a hedge. In this case you genuinely would be stuck with a $10 million tax liability despite only making $1 million in actual profit. However in this case, I really doubt that’s what happened. The IRS rules on wash sales were written in a bygone era when high frequency trading didn’t exist. The rules are very poorly worded and hard to interpret.

deleted 6y ago
[deleted]
mattnewton 6y ago
> but I’m virtually certain there’s an error with how Robinhood is calculating wash sale adjustments. Or, maybe it could be turbo tax importing the wrong info? IIRC they did not import the cost basis from employee purchase plan sales in my ETRADE account one year and treated it as a cost basis of 0. The trader in the article definitely needs to hire a CPA.
- samspenc 6y ago
  This is a well-known issue with TurboTax and how it imports ESPP cost basis. The same happens with Fidelity reports as well. But in this case, the scale (number of trades) seems to indicate this was a day trader who was frequently moving in and out of the same (or substantially similar) positions and hence not related to ESPP.
  - mattnewton 6y ago
    Right, it's a totally different error, just mentioned it to illustrate that just importing your brokerage account into Turbo Tax (what the article purports the Trader did) doesn't work 100% of the time. In this case I'm not sure if it's Turbo Tax or Robinhood calculating the cost basis after wash sales, just mentioning it could be another edge case where Turbo Tax is messing it up.
- radicality 6y ago
  I've wasted so much time with turbotax this year I'm thinking next year to either use some other tool and do everything manually or hire a CPA. Here's one thing I had a problem with this year - Turbotax incorrectly computed gains/losses for all my accounts because it started rounding cost basis and proceeds of _every separate transaction_ to the nearest dollar, accumulating the dollar. I can't fathom why the software even bothers with any intermediate rounding. Big thread [here](https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/turbotax-early-rounding-issues-creating-large-variances-between-turbotax-produced-return-and/00/1948037/highlight/false https://ttlc.intuit.com/community/investments-and-rental-pro...).
  - junar 6y ago
    For the record, other tax software does this type of rounding too. Unless you have really small lots, it shouldn't make a big difference, and I wouldn't worry about it. If you do have small lots, you can consider doing the summary method using Exception 1 (if eligible) or Exception 2 otherwise. https://www.irs.gov/instructions/i8949#idm140393400814208 https://www.irs.gov/instructions/i8949#idm140393400814208 Note that Exception 2 requires an attached statement (generally, your copy of the 1099-B). From what I've heard, some tax software supports PDF attachments, but others, like TurboTax, make you print and mail.
toast0 6y ago
As long as you don't make a wash sale between a purchase in an IRA (or maybe 401k) and a sale in taxable, the disallowed loss (as well as the holding period) is added to the cost basis of the replacement purchase. This delays recognizing the loss, and maybe you end up with a big gain in one year and a big loss in the next year, but you only really get screwed in the IRA case where the loss is disallowed in the taxable account and the basis isn't adjusted in the IRA; in that cass, the loss just evaporates.
o-__-o 6y ago
I think it’s a little nuanced than that. In your example if trade activity is ceased 30 days prior to tax reporting then the tax liability is only $1M. If stock B got stuck in the wash rule then you are on the hook for the complete $10M. Then the difference becomes business loss vs personal loss. On your personal taxes you cannot deduct that $9M liability all at once unless you have other capital gains to cover it. you can roll it forward a few years but that’s a massive loss most will likely never be able to gain from. Businesses can deduct 100% of losses against taxable income with the potential of triggering an audit at certain thresholds This is my poor understanding of wash sale rules wrt the IRS
radicality 6y ago
Btw, what tripped me up recently is that I misunderstood the "buy the security back within 30 days" part and was quite confused why my broker was showing me a wash sale: I did something like: * Day 1: Buy 100 shares of Stock A at $100 * Day 2: Buy 100 shares of Stock A at $110 * Day 3: Sell 100 shares of Stock A at $90 (using most recent lot for cost basis) Result: The loss of $10*100 on Day 3 is disallowed because the sale was _within_ 30 days of the last stock purchase. I failed to realize that it would apply to a period of 30 days both before and after a transaction, always thought the only way to trigger a wash sale is with a Buy.

deleted 6y ago

[deleted]

mattnewton 6y ago

> but I’m virtually certain there’s an error with how Robinhood is calculating wash sale adjustments. Or, maybe it could be turbo tax importing the wrong info? IIRC they did not import the cost basis from employee purchase plan sales in my ETRADE account one year and treated it as a cost basis of 0. The trader in the article definitely needs to hire a CPA.

samspenc 6y ago
This is a well-known issue with TurboTax and how it imports ESPP cost basis. The same happens with Fidelity reports as well. But in this case, the scale (number of trades) seems to indicate this was a day trader who was frequently moving in and out of the same (or substantially similar) positions and hence not related to ESPP.
- mattnewton 6y ago
  Right, it's a totally different error, just mentioned it to illustrate that just importing your brokerage account into Turbo Tax (what the article purports the Trader did) doesn't work 100% of the time. In this case I'm not sure if it's Turbo Tax or Robinhood calculating the cost basis after wash sales, just mentioning it could be another edge case where Turbo Tax is messing it up.
radicality 6y ago
I've wasted so much time with turbotax this year I'm thinking next year to either use some other tool and do everything manually or hire a CPA. Here's one thing I had a problem with this year - Turbotax incorrectly computed gains/losses for all my accounts because it started rounding cost basis and proceeds of _every separate transaction_ to the nearest dollar, accumulating the dollar. I can't fathom why the software even bothers with any intermediate rounding. Big thread [here](https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/turbotax-early-rounding-issues-creating-large-variances-between-turbotax-produced-return-and/00/1948037/highlight/false https://ttlc.intuit.com/community/investments-and-rental-pro...).
- junar 6y ago
  For the record, other tax software does this type of rounding too. Unless you have really small lots, it shouldn't make a big difference, and I wouldn't worry about it. If you do have small lots, you can consider doing the summary method using Exception 1 (if eligible) or Exception 2 otherwise. https://www.irs.gov/instructions/i8949#idm140393400814208 https://www.irs.gov/instructions/i8949#idm140393400814208 Note that Exception 2 requires an attached statement (generally, your copy of the 1099-B). From what I've heard, some tax software supports PDF attachments, but others, like TurboTax, make you print and mail.

toast0 6y ago

As long as you don't make a wash sale between a purchase in an IRA (or maybe 401k) and a sale in taxable, the disallowed loss (as well as the holding period) is added to the cost basis of the replacement purchase. This delays recognizing the loss, and maybe you end up with a big gain in one year and a big loss in the next year, but you only really get screwed in the IRA case where the loss is disallowed in the taxable account and the basis isn't adjusted in the IRA; in that cass, the loss just evaporates.

o-__-o 6y ago

I think it’s a little nuanced than that. In your example if trade activity is ceased 30 days prior to tax reporting then the tax liability is only $1M. If stock B got stuck in the wash rule then you are on the hook for the complete $10M. Then the difference becomes business loss vs personal loss. On your personal taxes you cannot deduct that $9M liability all at once unless you have other capital gains to cover it. you can roll it forward a few years but that’s a massive loss most will likely never be able to gain from. Businesses can deduct 100% of losses against taxable income with the potential of triggering an audit at certain thresholds This is my poor understanding of wash sale rules wrt the IRS

radicality 6y ago

Btw, what tripped me up recently is that I misunderstood the "buy the security back within 30 days" part and was quite confused why my broker was showing me a wash sale: I did something like: * Day 1: Buy 100 shares of Stock A at $100 * Day 2: Buy 100 shares of Stock A at $110 * Day 3: Sell 100 shares of Stock A at $90 (using most recent lot for cost basis) Result: The loss of $10*100 on Day 3 is disallowed because the sale was _within_ 30 days of the last stock purchase. I failed to realize that it would apply to a period of 30 days both before and after a transaction, always thought the only way to trigger a wash sale is with a Buy.