What’s Next for Gamestop?*

Taxes

As the saying goes, there are only two certainties in life — Death and Taxes. Everyone involved in GameStop, AMC, Blackberry, Bed Bath & Beyond, etc will have to pay income taxes on their gains. This is where the story can really start to hurt.

If you hold onto an investment for over a year, long-term capital gains rates apply (i.e. up 23.8% based on your income bracket). IF, and this is a BIG IF, you’ve been day trading these stocks/options or have held onto them for less than a year. You’re going to feel some pain.

Short term capital gains taxes can be as low as 10% (if you’re in the lowest tax bracket and live in a state that doesn’t have state income taxes) or as high as 54.1% if you are a high-income earner living in California.

You made a lot of money in just a few months? Great, well as a reward expect to pay a lot of taxes as well. Don’t spend that money — the IRS doesn’t accept IOUs and assess your penalties and interest. These can really hurt.

SEC / Government Actions 1

This is where the situation gets squishy. The SEC has a division that monitors whether people violated securities laws. They’ll be looking both at the people in the Reddit forums as well as Robinhood.

Reddit people — On January 29th, the SEC put out a statement saying they were investigating potential stock manipulation. They’ll be getting a big data dump from Reddit and other forums to look at who said what and when. Individuals that posted their own opinions are probably fine. What they will be looking for are people that spread false information in these forums, people that were paid to make postings and SEC/FINRA registered people (i.e. stock professionals) making posts in these forums. In the late 90s, the SEC went after a lot of these types of people who were posting in Yahoo finance websites/forums (i.e. the Reddit of the 90s).

Robinhood and other brokerages — there definitely will be some government hearings on Reddit. This is more for show than anything else. AOC and others will pound the table and say that there wasn’t a level playing field and shame on you Robinhood for not allowing your customers to trade while the big boys still could. Beyond just news coverage and posturing for the camera, very little will affect Robinhood. In fact, the new coverage will be a positive — it immediately raised $3.4 billion right after it halted trading in those hot stocks.

The SEC is similarly going to look at Robinhood. Robinhood will say it had to stop trading because of the collateral requirements and likely invoke customer protection claims. As GameStop and others got hotter, clearinghouses required more collateral to be posted. In order to trade with other large entities, a brokerage has to post collateral at clearing houses to cover potential losses. This meant that as more and more Robinhood users were trading in the stocks, the collateral requirements kept increasing, and Robinhood. I’m also sure in their terms and services (that no one reads), it probably says somewhere that Robinhood can halt trading or cancel customer accounts at its’ own discretion. It’s not a good defense when a company uses that as an explanation, but it is what it is.

So where do we go from here?

1. Again, if you’re someone that made a lot of money very quickly from trading in GameStop et all, the taxman cometh. Robinhood has to report all of its trades and yours will be included as well. The IRS will know that you made money and owe them.
2. The SEC will probably find that some registered professional were posting in the Reddit forums and go after them. Regular people will probably be fine.
3. There’s probably going to be some regulations passed regarding short-selling of stocks — it was insane that over 100% of these stocks were shorted. There are probably some changes to come there.
4. Robinhood will be fine. Look for an IPO on the horizon.
5. Once the just settles in a couple of months, these zombie stocks will fall back to earth. Those that didn’t sell and kept wishing for the high prices to return will incur big hits. Hopefully, you didn’t put too many money (e.g. your retirement savings) into this gambling exercise.

*For full disclosure, I own puts purchased when GME was in the high $300s

+I am not an accountant, lawyer or financial planner. I didn’t even stay at a Holiday Inn Express last night. I am not giving you tax, legal or investment advice. Consult your own financial planner, accountant and lawyer.