In addition, “to help our clients keep track of their TD Ameritrade transactions, … they can see their realized gains and losses on their cost basis page,” she explained. “Understanding this can be a complex issue, we invite clients with any questions to check out our tax resources page or contact a tax services representative by calling us … during standard business hours.”
More Tax Info, Options Needed
In Levine’s experience, “I’m not saying one doesn’t exist, but I’m not seeing a platform where you submit the trade and … there’s a flag that says, ‘Hey, you know, you’re making a wash sale. This will do X,’ or ‘This is going to have this impact, so talk to your tax professional’ or something like that.”
Typically, investors run into tax issues if and when they get a 1099-B form. That’s when they “see the adjustment column and all of a sudden [they’ve] got a whole bunch of wash-sale losses that are disallowed,” he explained.
For Christine Benz, director of personal finance for Morningstar, the cases being raised by advisors on social media are leading to “an open and healthy debate about how much platforms should interject themselves into [investor] decisions like this.”
When you pay your bills online through a banking platform and “mistakenly pay it again a week later, … it’ll send up a flare saying, ‘Hey, this is identical to another payment you just made. So, the question is how much should the [investing] platform get into putting guardrails around investors?” Benz asked.
Morningstar’s research has found that most investors “don’t do a great job from the standpoint of trading,” she said. “They don’t capture a fund’s full return, for instance. So, less trading is more when it comes to successful investing.”
The trouble goes beyond the wash-sale rule, Benz states: “Some basic knowledge of how accounting works and how income, short- and long-term capital gains work should be front and center on trading platforms,” she said. “I’d also like to see it be a little clearer when it comes to how firms are tracking cost basis. Sometimes this is buried in disclosures.”
Also important is the fact that “if you’re in a taxable account, every time you do the trade, you have a taxable event,” said James Angel, an associate professor at Georgetown’s McDonough School of Business. “The trading is free, but at the end of the year, you’ve got an awful lot of taxable events, gains and losses, and that can get real complicated, real fast.”
These issues give advisors more impetus to “educate the public and really make sure we keep pushing the message of long-term investing,” said Courtney Ranstrom, CFP, co-founder of Trailhead Planners.
While this approach isn’t exciting as the day-trading scene, “It’s our jobs to be relatively boring, and we should be making [investing] boring for our clients in a way that’s very good for them,” explained Ranstrom. “This way, they can focus on and realize their goals — around their children, their careers and retirement.”
DIY investor situations like the one raised by Wruk give advisors the chance “to warn people that trading is not a strategy,” says Dawn Santoriello, CFP, president of DS Investment Strategies. “It’s best to work with an advisor, since more [investors] get burnt than get lucky” when going it alone.
The case of the 20-year-old Robinhood investor who died by suicide nearly a year ago after an apparent negative balance of $730,000 in his account, in which he traded options and other products, “shows this is a huge problem,” says Santoriello, as is the possibility of having an $800,000 tax bill. “Most folks don’t know about the wash rule, and we want to inform people about it.”
To Herron, the big 1099-B forms and DIY investors’ lack of understanding about tax rules “is so frustrating.” While he appreciates the upside of technology overall, the advisor remains deeply concerned about DIY investors’ ability to get up and trading on apps “in like two minutes,” he says.
“There’s something to be said for having more financial education in this country where we hit people at an early age and showed them the pros and cons [of different investing approaches],” the advisor explained.
“Everybody needs to learn about certain things, but an $800,000 learning lesson seems outrageous,” he said. “We need to do better as a society with education to make sure that people know what they’re getting into.”