Securities traders face accounting challenges over cost-basis reporting including wash sale loss adjustments.
Trade accounting for securities
When it comes to a trading activity, it’s wise to do separate accounting for trading gains and losses vs. expenses. A consumer off-the-shelf accounting program is fine for keeping track of expenses, non-trading income, home office deductions and itemized deductions. But when it comes to trade accounting for securities, these programs are inadequate — you may need a specialized securities trade accounting program and/or accounting firm, or in some cases, brokerage firm reporting may be sufficient. Futures accounting isn’t required, as you can rely on the tightly controlled one-page 1099-B with summary reporting, using MTM reporting. Although spot forex accounting could be a nightmare if you try to do it yourself, you can rely on the broker’s annual tax reports and should use summary reporting. Spot forex is not a “covered security,” so there are no Form 1099-Bs.
Keep track of expenses year round
If you qualify for TTS, you benefit from business expense deductions. Investors have some investment expenses, excluding home office and education, and investment expenses generally have less tax benefit with various limitations on Schedule A miscellaneous itemized deductions.
Many traders are not sure if they will qualify for TTS until year-end, so it’s important to keep track of all your trading and other expenses in your accounting solution throughout the year. Traders with investor tax status don’t know their tax bracket, as their income fluctuates significantly. Don’t assume you will get investment expense tax benefits, as you won’t know how you make out with the 2% adjusted gross income (AGI) limitation, AMT or the Pease limitation until year-end. So keep good track of expenses all year! Use a consumer accounting program, solution or app of your choice. At a minimum keep track of all expenses using a worksheet.
For more in-depth information on accounting solutions for traders, read Green’s 2017 Trader Tax Guide.
If you need help with accounting, consider our accounting service.