Many newbie investors who jumped on the bull run of 2020 now find themselves drowned in tax paperwork – as could any newbie who joined this year’s GameStop frenzy or the Bitcoin bonanza for tax filing. ‘next year.
Whenever a trader sells a stock or cryptocurrency, it counts as a taxable moment. Because these traders can move in and out of different stocks and coins several times a week or day, they may be surprised when hundreds of pieces of paper arrive at their doorstep. The IRS wants an overview, and may want a cut, of it all.
“My Robinhood tax form for 2020 is 374 pages long. Day trading is fun, ”Mike Zeimer, 35, marketing and music entrepreneur from Dallas, Texas, said in an online post. When the pandemic ended his live events business, he switched to day trading. The earnings allowed him to pay his bills and build a recording studio, but now he has to throw hundreds of more pages at his accountant.
“I let him know in advance that I had survived day trading 2020 and that my tax forms would be more complicated,” Zeimer said. “I just got them last week, so he’ll get them all this week.”
The stock race, with the S&P 500 ending the year up more than 16%, has paid off generously for those with the right timing and the stomach, drawing players from all walks of life, from farmers and engineers to engineers. bored, fired and desperate. Now comes the hangover.
“Last year massive capital gains were made for all ages and ages. Almost everyone just got booked $ 200,000, half a million, a million dollars and didn’t pay the estimated taxes. They have massive tax bills due April 15, ”said Robert Green, a CPA at Green, Neuschwander & Manning, a company specializing in tax matters for frequent traders, in a phone call. “They’ve never paid tax bills like this before.”
New traders may find it difficult to report their trades, especially when dealing with foreign and more obscure exchanges. Some exchanges allow the downloading of transactions, while others allow customers to use third-party software capable of downloading their transactions to facilitate the deposit. Robinhood is sending its users 1,099 forms for filing, though forms were delayed for some after the company missed a deadline.
Tax experts and the IRS say taxpayers should be aware of several unique issues with daily trading stocks and cryptocurrency.
Equity and crypto day traders can execute frequent trades as part of their trading strategy, but this can expose them to higher taxes. The IRS considers stocks and cryptocurrency to be property, and this is where capital gains tax comes in.
Property held for at least one year is eligible for long-term capital gains tax, with a maximum rate of 20%. Property held for less than a year is taxed as ordinary income, subject to a tax rate of 37%.
To help determine if the IRS is interested in crypto holdings, the agency has moved a question on cryptocurrency holdings to the top of the 1040. Now, it’s impossible to avoid, even if some want it.
“A lot of crypto-type people are non-compliant people,” Green said.
The IRS has tried to better understand the situation and gain more visibility into the partially anonymous nature of some crypto transactions.
“The IRS has also had some success in obtaining records from third-party cryptocurrency facilitators of taxpayers who have engaged in cryptocurrency transactions,” said Mark Luscombe, senior analyst at Wolters Kluwer Tax & Accounting , in an email. “The IRS can also use this information to search for tax returns that do not report cryptocurrency transactions. “
With the volatility of the 2020 bull run, equity investors may face significant gains or losses. But there is a silver lining in the losses. Taxpayers are only taxed on net gains – so they can subtract their losses from their gains to reduce their regular taxable income, up to $ 3,000. Losses greater than this amount can be carried forward and used in subsequent years.
A speedbump that can upset Robinhood-type day traders is if they have sold stocks at a loss and then bought more of the same stock within 30 days. Next, the IRS will not allow them to deduct the loss from what is called a “wash sale.”
Retail day traders can also qualify for coveted “trader tax status” if they can meet certain requirements that show they trade frequently and continuously. This allows you to deduct certain business expenses, setup costs, and home office deductions.
Experts recommend that traders set aside a third of their earnings to cover taxes, but many will not, Green said.
“They should look at their marginal tax bracket and put an estimated amount into it. But if they’re big, they don’t want… they want their capital to work in the market, ”he said.