Broker Check

Short Term Capital Gains- the Sheriff of Nottingham for Robinhood Investors

| January 27, 2021

"It's not what you make, it's what you take!"

Robinhood is a popular smartphone app retain investors can use to easily and quickly trade stocks and cryptocurrencies.The ease and convenience of trading as well as the $0 explicit commissions make the platform an appealing solutions for those looking to invest in securities and crypto.

Recently, some traders have made significant profits. Many investors are used to investing in their IRAs. IRAs, 401ks and other qualified plans have no tax consequences until funds are withdrawn. But in a taxable brokerage account, with significant profits can come significant taxes.

The US tax code disincentivizes short term trading by taxing realized gains at a higher rate if they are realized within a year. To realize a gain, you have to sell all or part of your position. So for buy and hold investors, no worry! You get the preferred, long term capital gains rates. For Married folks making ~$80k or less, the long term capital gain rate is 0. For folks making over $80k and less that 501k (again, married folks) they are paying 15%. For top earners, 23.8%, including NII tax.

Folks who buy and sell without a year elapsing, however will pay taxes at their ordinary income level, which tends to be significantly higher than the long term capital gains levels! This can create a surprise around tax time for those who are not used to paying these taxes. For those with significant gains, they can actually INCREASE your tax bracket and your tax obligations. For some traders, consulting a tax advisor will be well worth the cost.

How do you reduce your tax bill for 2021 while still being able to express your ideas as a trader?

  1. Wait a year until you sell a stock for a profit to realizes the preferred long term capital gains rate
  2. If you feel like you can't wait to realize these gains, there are certain options strategies that can be used (such as cost-less collars) to lock in your gain.
  3. Titrate your gains to strategically stay in certain income levels, especially in retirement, where medicare premiums can be affected by income spikes.
  4. Strategically take capital losses throughout the year and at year end to offset potential capital gains.
  5. Hire a good financial planner and tax advisor to help you create a tax plan

As always, feel welcome to contact us at any time with questions or comments. Remember to always coordinate tax strategies with your tax advisor!