I had no idea.   To be honest, I’m not sure many folks know about these issues, either.

I’ve been a dabbler in stock investing over the years.  Sure, I’ve day traded, and there were years when I bought and sold stocks a lot, but generally, I now buy a few stocks and a bunch of mutual funds.   But, my accounts are all at standard brokers- eTrade, Schwab, Fidelity.

These firms operate the way one would expect.  They track the purchase and sale of my stocks.  So, that at the end of the year (like now), I can properly report my profits and losses on my income taxes.

Imagine my surprise to find out that these new apps  (RobinHood, Webull,  and Public.com, plus SoFi and Uphold) – the ones hoping to garner young folks and newbies as adherents- don’t follow the norms.

These apps just put all of one’s purchases in a bucket.  Which means if you want to sell some stock (and not all of your holdings in a specific security), you don’t get to pick the specific lot you purchased.  Instead, the app sells a random lot- one that may cause you to lose money, one that may cause you to make more money than you want.  They don’t even track wash sales. (These are sales of stock that you buy within 30 days of selling a stock that incurred a loss.)

Here’s a great example. I bought Tesla stock over the past 7 months.  One lot was purchased at $ 400; the next at $ 650, and the most recent at $ 850.  Now that Tesla is trading at $ 675, I have various options.  I could sell 100 shares saying these were the ones I bought at $ 850.  That loss of $17500 could shelter an awful lot of capital gains I earned with my mutual funds.  Or, I could say I sold the stock I bought at $ 400, which would mean my capital gains would be $ 27500.  That’s a big spread.

But, if I were using RobinHood or Webull, I wouldn’t get that choice. (These apps use what is called FIFO- first in, first out; meaning the oldest shares are sold first. Uphold is completely different- they use HIFO- highest in, first out! SoFi arranges your sales that losses come first, then gains.) In other words, these firms choose the lots you plan to sell.  You can see how that would affect your tax bill.  Moreover, the oldest lot could mean the sale was a long one- one that I held for more than a year.  (Note further than short term sales- sales of stocks for which the holding period is under a year- are taxed at ordinary income tax rates (not the long term capital gains rate.)

(Please note if you are diligent- you can get RobinHood to track your lots.  Lots of small print to read, lots of conversations.  Things like searching one’s history, mailing notes with six points (dates and prices) and then hope when the sale is complete two days after the trade date, it’s the lot you hoped to choose.)

Not exactly the news you want to hear when you are ready to file your taxes.

Maybe you should move your stock holdings to conventional dealers.  They no longer charge for stock transactions, either.

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