Last week, Robinhood temporarily suspended trading of popular “meme stocks” after a buying frenzy that caused an unprecedented spike in its valuation.
On the morning of January 28, Robinhood announced that it was limiting users from buying stocks from several companies, including GameStop and AMC. At the time, the trading app cited “market volatility.”
The post read in part:
“In light of recent volatility, we are constraining transactions for certain securities to position closing only, including $AMC and $GME.”
In a different post, the company explained that it made the restrictions because of regulatory issues. According to the post, Robinhood explained that it was required to keep a considerable amount of money on hand. The amount is reportedly a requirement for processing all the trades that were going through its clearinghouse.
Vlad Tenev, Robinhood’s CEO, explained on the Good Time Show with Elon Musk that they received a file from National Securities Clearing Corporation (NSCC) which requested them to have about $3 billion in capital. Reportedly, Robinhood had raised about $2 billion in capital.
“We had no choice in this case.” Teven added, “We had to conform to our regulatory capital requirements.”
Many were not happy with the decision. One subreddit’s Twitter account posted:
“Individual investors are being denied their ability to trade on the Robinhood app. In the meantime, institutional investors and hedge funds continue to trade as normal.”
The decision also got some legislators talking. Some Congress members, including Rep. Alexandria Ocasio-Cortez and many others, called for a hearing on Robinhood’s actions.
Notably, the move caused many in the trading community to threaten to leave the platform. Many that tried to leave were faced with two problems. First, Robinhood does not support withdrawals. Second, any attempt to cash out attacked capital gains tax even when the users intend to put the cash into a different exchange.
Luckily, Shehan Chandrasekera, head of tax strategy for crypto tax software firm CoinTracker has solutions to reducing or getting rid of tax issues on the Robinhood platform.
First, Chandrasekera suggests that users can wait for a year for the coins to qualify for long term capital gains. This will lower the maximum tax rate to 20% from 37%. Notably, long-term capital gains can go so far as to be subjected to a 0% rate if the holder meets certain income criteria.
Chandrasekera also suggests users can sell the dip. While this is not the best alternative, he suggests that when a person spends more on crypto than the current market value, they don’t have to pay capital gains. The underlying principle is since you haven’t made anything, you will not be obligated to pay any taxes. Once a user sells the dip, they can then use the cash to invest in another crypto exchange.
A week later, Robinhood lifted the restrictions. GameStop shares, which had crashed by nearly 83%, rose by 8%, while AMC rose by 5% after the limits were lifted.
Teven acknowledged the recent events as a challenge adding:
“Transforming an industry from the inside takes determination, hard work, investment, and a laser focus on the people we want to serve. Occasionally there are shortfalls along the way.”