Don’t let your stockbroker off the hook when it comes to tax planning.  Many people work with brokers when they buy and sell stocks.  Many people now, because of the internet, also have become their own stockbrokers, doing their own research and trading on various platforms.  Whether you use a professional or do your trades yourself, you still need to hold your stockbroker accountable.  What do I mean?  If a broker is helping you buy and sell, they had to take a Series license of some kind.  Sometimes, an RIA (Registered Investment Advisor) has taken a Series 65 exam.  If it’s a representative of a broker/dealer, perhaps they’ve taken a Series 6 or a Series 7 exam.  There are other possibilities, but the point is, these exams are difficult.  They take a lot of learning, and much of that learning is about taxation.  

No stockbroker that’s licensed out there in the world can ignore taxes, and then blame a lack of education.  To get the very license they hold to help you trade, they had to know more than the basics.  Also, the organizations themselves, registered investment advisory firms, broker/dealers, and other organizations that buy and sell stocks, have compliance requirements that now demand a fairly high level of fiduciary information, separate from behaving as fiduciaries — that’s another topic for another blog sometime — and the questioning includes liquidity, tax brackets, and other critical items about you that they must know before they make recommendations.  

On the professional side of the house, if you hear something like “Well, people pay taxes” or “Well, don’t let the tax tail wag the dog,” you’re talking to someone that is unconcerned, but not unaware.  They don’t want to deal with the topic, or they have too tight a constraint from their compliance department or there is some other reason.

For whatever reason, in our humble opinion, this makes them perhaps dangerous to be dealing with.  Whether it’s because of a lack of knowledge or lack of caring, either way, that’s no excuse.  If their hands are being tied by their compliance systems above them, then those are dangerous compliance systems if they don’t allow integration of tax information when you trade, buy, sell or acquire securities.  Taxation can be an important determinant in whether you win or lose.  That’s the professional side.  In the last few years especially, many people skip using a professional and do it themselves. Although you have an excuse for the lack of understanding of your tax side since you are not forced to take an exam, you probably should be more informed.  

Although I have met many stock traders that do as good a job as the average broker, abilities vary wildly from person to person.  Unfortunately, most have a linear view of their success.  “I’ve turned my $100,000 into $120,000.  I’m great. I made 20%.”  With the portfolio still together inside a qualified or non-qualified account, they haven’t yet actually made anything, because they haven’t sold those securities, and that value could be less in a matter of moments.  The markets can be volatile, as we have learned (often the hard way) throughout history.  Their account might be up today, but without action, may be down tomorrow, resulting in no real gain.  However, if they do take action while the account is up, do they know what the tax consequences will be?  Too often, that answer is no.  They made 20% after solidifying their gain, then don’t realize what it has done to them until they file their taxes the following year.  Often, that event will cost them more than just capital gains tax.

There are many tiers and secondary actions that take place in taxation.  For instance, if you trade stocks and don’t hold them for at least a year, those profits are taxed as ordinary income. You may end up paying 35% federal tax, plus 6% or 7% state income tax. Since you as your own trader are not forced to take an exam, you don’t have to know these things.  But someone should.  Nobody, you or a broker, should truly be allowed to manage your stock portfolio without a basic course in taxation under your belt.  Go to H&R Block, take the 10-week course.  Pay special attention to capital gains. If you’re going to be a stock trader, understand the difference between short-term and long-term gains and losses, carry forward losses, the basic terminology of keeping your winnings or sharing your winnings with Uncle Sam. Or taking advantage of losses by getting tax breaks on them down the road. You should know the topic.

If you use a broker and she says “Don’t let the tax tail wag the dog”, then you need to use a different broker. The topic should be an open, honest discussion where they demonstrate that they care, and they have resources to find answers, if they don’t actually do it themselves. Not doing it themselves is fine, but they can’t ignore the subject altogether. They need to be able to help you learn what you need to know, even if it’s not the favorite part of their job. It’s still well within what they learned in order to assist you, and they should feel responsible. But what if you love your broker, he doesn’t want to engage in tax planning, and you don’t want to learn it either? Then engage a tax planner. They are all around you. They are often also licensed stockbrokers. Perhaps a better choice for you, but nonetheless, you could have one stockbroker that does your trading and another that you hire just to do the tax planning. The cost you would incur to hire an external tax planner will be smaller than the tax bill for getting it all wrong. Know what you’re doing. Don’t let your stockbroker off the hook, even if it’s you.