Securities traders need to watch out for higher tax rates, wash sales, capital-loss limitations and accounting challenges.
- equities (stocks)
- equity (stock) options
- narrow-based indexes (an index made up of nine or fewer securities) and options on narrow-based indexes
- exchange-traded funds (ETFs) and options on ETFs taxed as Registered Investment Corps
- mutual funds
- single-stock futures
Short-term capital gains rates are the ordinary tax rates, currently up to 39.6% for 2017, and 37% for 2018. With the default realization (cash) method, only realized gains and losses on securities are reported for the tax year. Section 1091 wash-sale loss deferral rules apply throughout the year with IRAs and individual taxable accounts (see Wash Sale Losses). Securities traders using the cash method may defer unrealized gains (or losses) on open positions until realizing a gain (or loss) on a sale. Long-term capital gains rates — up to 20% for 2017 and 2018 — apply to sales of securities held for 12 months or longer.
We recommend that business traders in securities (with TTS) consider a Section 475 MTM election to have business ordinary loss treatment — navigating out of wash-sale loss rules and capital-loss limitations on business trades — since they already are paying ordinary rates on short-term capital gains. For 2018, Section 475 ordinary income is qualified business income for the new 20% deduction on QBI in pass-throughs. (See Section 475 MTM.)
Tax rules require reporting realized securities trades on a trade by trade (or line by line) basis on Form 8949, including reporting wash sales on each transaction. (See Accounting Solutions.)
For more in-depth information on securities tax treatment, read Green’s 2018 Trader Tax Guide.