Trading App Design Creating Nasty Tax Headaches for New Investors

Chris Gaetano
Published Date:
Apr 16, 2021

The proliferation of trading apps such as Robinhood have allowed people who never would have invested before to play the market, but the way they're designed means it's all but impossible to perform tax maneuvers that traditional investors take for granted, reported the Wall Street Journal. Specifically, these investors are missing out on the ability to choose which specific securities they can sell when it comes time to offload investments.

Imagine an investor interested in a public company we'll call Typical Example LLC. This person uses an app to buy one share per month from January to June. Though the shares were all bought at different times at different prices, the app lumps them all together as a single block. If the investor had been going through a traditional broker, he or she would be able to identify which specific ones to sell, as different shares have different tax implications. Say the January share cost $100, the February share cost $200, and the March share cost $50 (the CEO made a really ignorant comment on TV and doubled down on Twitter when called out).

It is now April, and the share price is $150. Our investor wants to sell. If the investor sells the January share, it is a $50 gain. If the investor sells the February share, it is a $50 loss. If the investor sells the March sale, it is a $100 gain. Each of these sales carries different tax implications. With a traditional broker, the investor can decide which of these shares to sell and plan accordingly. With apps, though, sales tend to follow a first-in-first-out methodology (the oldest share is sold first), which can help in some circumstances and hurt in others. Regardless, though, the investor generally does not have a say in which one is sold (Robinhood does allow specific lot identification, but only through a process so Byzantine it would insult the actual Byzantines). Even if the investor doesn't owe money, just combing through sales and figuring out total gains or losses is a sanity-testing experience.

Some apps, hearing these complaints, are working to make specific lot identification easier; others have given no indication at all they plan to do so.

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