Category: Accounting

FIFO vs. Specific Identification Accounting Methods

December 1, 2021 | By: Robert A. Green, CPA | Read it on

By default, the IRS, brokerage firms, and most trade accounting programs use the First-In- First-Out (FIFO) accounting method for securities. If you sell security A, its cost-basis is the first lot purchased — the first one “out” or sold. FIFO suits most active day traders.

But there is another option called the Specific Identification (SI) accounting method. Assume you bought several lots of security A over the year while the stock increased in price. You might prefer to use SI accounting instead of FIFO to specify a higher cost-basis lot to reduce your short-term capital gains for 2021. This enables you to hold the older purchased stock for 12 months at a lower cost-basis for a long-term capital gain taxed at a lower rate (up to 20% for 2021 and 2022).

The IRS requires contemporaneous action for using SI. You must specify the lot to sell before executing the sale, and the broker must confirm those instructions in writing at that same time. You cannot decide to use SI after the sale’s settlement date, like when preparing your tax returns. The IRS provides a little leeway to correct communication errors with the broker by allowing a settlement date rather than a trade date.

FIFO is also widely used for cryptocurrencies. While SI is the default accounting method for intangible property, it’s challenging to operate with cryptocurrencies. See Frequently Asked Questions on Virtual Currency Transactions | Internal Revenue Service (irs.gov)

How To Avoid Taxes On Wash Sale Losses

August 5, 2019 | By: Robert A. Green, CPA | Read it on

Many securities traders incur significant tax bills on phantom income caused by “wash sale losses disallowed” on form 1099-Bs. Traders are often surprised because most brokers don’t report wash sale (WS) loss calculations during the year. In this blog post, learn how to deal with WS loss adjustments and how to avoid them in the first place.

WS loss reporting on 1099-Bs is confusing
Broker 1099-Bs report “wash sale loss disallowed” (box 1g), and it’s not uncommon to see an enormous amount for an active securities trader. The 1099-B also reports “proceeds” (box 1d), “cost or other basis” (box 1e) and several other related amounts. For example, $10M proceeds minus $9.9M cost or other basis, plus $150,000 of wash sale loss disallowed, equals $250,000 of taxable capital gains. The 1099-B cover page has summary numbers, and supplemental schedules include each securities trade for all of these boxes.

The essential point is that WS loss disallowed in box 1g is for the entire tax year. However, WS losses deferred at year-end cause phantom income in the current tax year. Many WS losses during the year might fade away by year-end (see how below). Unfortunately, brokers do not report WS losses deferred at year-end, and clients need that information. If a trader uses trade accounting software, they need this information to reverse WS loss deferrals from the prior year-end on January 1 of the current tax year.

For example, two different traders can have $1M of WS loss disallowed in box 1g. Trader A doesn’t have WS losses at year-end, and she is not concerned with those adjustments during the year. She sold all open positions by year-end and did not repurchase substantially identical positions in January. Trader B also sold all positions by year-end, but he made repurchase trades in January, which triggered $50,000 of WS losses deferred at year-end. Trader B delayed the December WS loss to the subsequent tax year.

Traders need ongoing WS loss information throughout the year to prevent this predicament. Some monthly brokerage statements include cost basis amounts for month-end open positions listed on the report, and other monthly brokerage statements do not.

Most traders don’t realize they have a WS loss problem until they receive 1099-Bs in late February. That’s too late to avoid WS losses. Some traders and tax preparers import 1099-Bs into tax preparation software. Others enter the amounts to Form 8949 and then attach the 1099-B for details. If the taxpayer has cost basis adjustments, the IRS requires Form 8949; listing each securities proceeds, cost basis, WS losses, and other cost basis adjustments. However, there’s a problem relying solely on 1099-Bs because IRS WS rules for taxpayers vary from WS rules for brokers in preparing those 1099-Bs.

WS rules for taxpayers and brokers are different
Taxpayers must calculate WS losses based on “substantially identical securities” (i.e., Apple equity vs. Apple options), across all taxpayer’s brokerage accounts, including IRAs and spousal accounts if married/filing joint. Conversely, brokers calculate WS based on “identical securities” (an exact symbol) per the one brokerage account. This apples vs. oranges is problematic since the IRS seeks to match broker 1099-Bs to Form 8949 prepared by taxpayers.

Trade accounting software can help
Traders should consider using an IRS-compliant trade accounting software or a professional service using such software. Contemporaneous use of the program allows traders to avoid WS loss adjustments with potential WS loss reports. The software/service also gives taxpayers a second opinion vs. broker 1099-Bs.

Taxpayers and accountants are entitled to depart from 1099-Bs and explain why in the tax return footnotes. For example, a 1099-B might treat an ETN prepaid forward contract (i.e., BATS: VXX) as a security with wash sales. However, an ETN structured as a prepaid forward contract (PFC) is not a security, so WS losses don’t apply. A CBOE-listed option on an ETN/PFC is a “non-equity option” in Section 1256, although most 1099-Bs treat these options as securities subject to WS losses. Many brokers rely on tax treatment provided by exchanges, who try to fit financial instruments into two boxes: securities vs. section 1256 contracts.

Traders should try to reconcile Form 8949 proceeds with 1099-B proceeds. However, they should not expect to match cost-basis information, if trade accounting software calculates WS losses differently.

Trade accounting software downloads all trades, and the program automatically calculates WS losses based on IRS rules for taxpayers, not brokers. The program explains the rationale and provides details on various tax reports.

The 1099-Bs might use FIFO or specific identification and try to reflect the same accounting method in a trade accounting program.

For the first year of using trade accounting software, traders should enter open positions from the prior year-end with original-cost basis. Additionally, traders should enter deferred WS losses applied to those open positions. Traders should also enter WS losses deferred on closed-positions repurchased within 30 days in January. Trade accounting programs do not download this information from the prior year.

It would come in handy if the broker provided the WS loss deferred at year-end. If that amount was available, you could enter it as a cost basis adjustment, in addition to open positions with an original cost basis.

In the second year of use, the trade accounting program will automatically carry over open positions and wash sale loss adjustments from the prior year. Consult the program vendor and or trade accounting expert.

Jason Derbyshire of TradeLog software says: “If brokers provide detailed reporting of WS loss deferrals at year-end, TradeLog could utilize that information to help automate input into the software. This information would enable traders to accurately track those deferred losses in the software, and make more informed decisions to capture those losses, if needed, in the following tax year.”

What exactly is a wash sale loss?
A wash-sales loss is a timing issue. If you sell a security for a loss and repurchase it 30 days before or after, you cannot deduct the economic loss immediately in a taxable account. You must add the WS loss to the replacement position’s cost basis, which kicks the can (loss) down the road.

WS loss adjustments made during the year in taxable accounts might not be a problem at year-end. Some fade away. For example, a trader can trigger a WS loss every month during the year but absorb it with a significant capital gain on that security toward year-end. Additionally, the trader can “break the chain” at year-end by selling the position and not repurchasing it for 30 days.

There are also permanent WS losses triggered by IRAs, which are catastrophic. When you sell a position at a loss in a taxable account and repurchase a substantially identical position within 30 days in an IRA, there is no way to record the WS loss. Brokers don’t report these types of WS losses since they don’t calculate WS across more than one account at a time. If you trade in an IRA only (i.e., you do not trade in taxable accounts), then you don’t have these WS loss issues.

Strategies to avoid wash-sale losses
Consider a “Do Not Trade List” to prevent permanent WS between taxable and IRA accounts. For example, a trader could trade tech stocks in his taxable accounts and energy stocks in his IRA accounts.

Taxpayers can “break the chain” on WS losses at year-end in taxable accounts to avoid deferral. If a trader sells Apple equity at a loss on December 20, 2019, consider not repurchasing Apple equity or Apple equity options until January 21, 2020. That avoids the 30-day window for triggering a WS loss. In December 2018, many traders realized tax losses before year-end with a market correction. Some didn’t want to wait 30 days and miss the January 2019 rally, thereby triggering significant WS loss deferral at year-end 2018. Deferral of WS losses can become a problem if it causes a capital loss limitation in the subsequent tax year.

WS loss adjustments during the year in taxable accounts can be absorbed if traders sell/buy those open positions before year-end with a profit.

Consider a Section 475 election. Traders eligible for trader tax status (TTS) are entitled to elect Section 475 mark-to-market (MTM) accounting, which exempts them from wash-sale loss adjustments and the capital-loss limitation. I call it “tax loss insurance.” Don’t enter Section 475 trades on Form 8949; use Form 4797 Part II (ordinary gain or loss). Although Section 475 extricates securities traders from the compliance headaches of Form 8949, it does not change the requirement for reporting each trade on Form 4797.

We recommend trade accounting software to generate Form 4797. If a taxpayer elects Section 475, she will need that software to calculate a Section 481(a) adjustment, too. Even with a Section 475 election, the trader still needs to make the manual entries for open positions and opening-year WS loss adjustments mentioned earlier. The 2019 Section 475 election due date for individuals was April 15, 2019, and March 15, 2019, for existing partnerships and S-Corps.

Section 475 ordinary income is “qualified business income” (QBI). A TTS trader with 475 income net of business expenses is eligible for a 20% QBI deduction, providing the trader is under the taxable income thresholds for a “specified service business.” QBI excludes capital gains, interest, and dividend income.

Consider a new entity. Trading in an entity account might help avoid ongoing WS loss problems. The company is separate from the individual and IRA accounts for purposes of wash sales since it is a different taxpayer. The IRS is entitled to apply related party transaction rules (Section 267) if the entity purposely tries to avoid wash sales with the owner’s accounts. If the company qualifies for TTS, it can consider a Section 475 MTM election exempting it from wash sales (on TTS positions, not investment positions). A “new taxpayer” entity is entitled to elect Section 475 by internal resolution within 75 days of inception. That comes in handy after missing the 475-election deadline for individuals by April 15.

Trade accounting for securities is less complicated with a new entity since there are no opening-year manual entries for WS losses deferred from the prior year-end.

Trade Section 1256 contracts and other financial instruments that are not considered securities for tax purposes. Learn about Section 1256 contracts in my blog post: Trading Futures & Other Section 1256 Contracts Has Tax Advantages.

The following financial instruments are not securities or 1256 contracts: ETN prepaid forward contracts, cryptocurrencies, precious metals, forex, and swap contracts. Only securities are subject to wash sale loss adjustments.

GNM CPAs Darren Neuschwander, Christie Kam, and Amanda Smitson contributed to this blog post.

Learn more about wash sale loss rules in Green’s 2019 Trader Tax Guide.

Cryptocurrency Traders Should Consider These Two Tax Accounting Solutions

October 28, 2017 | By: Robert A. Green, CPA

Shutterstock: Cryptocurrencies

Shutterstock: Cryptocurrencies

Forbes

Smart Tax Accounting Moves For Cryptocurrency Traders

Update: The IRS calls for the “specific identification” (SI) accounting method for use on sales of property, including intangible property (coin). IRS regulations for SI require “adequate identification” of lots sold on a contemporaneous basis, and I don’t think most coin traders comply with these rules.  In June 2016, the AICPA asked the IRS if coin traders could use “first in first out” (FIFO) as an alternative solution, which the IRS permits for securities. Unless you comply with SI rules, I suggest using the FIFO accounting method for coin. (See Accounting Method Impacts Crypto Income Taxes.)

If you have multiple cryptocurrency (coin) trades, consider a trade accounting solution dedicated to coin transactions. The program should calculate taxable income and loss based on IRS rules for coin transactions. It should generate capital gains and losses reports to support Form 8949 and “other income” statements. The program needs to account for all coin transactions, including coin-to-currency trades, coin-to-coin trades, receipt of coin in a hard fork or split transaction, purchases of goods or services made with a coin, and mining revenue.

I reviewed two coin accounting solutions that fit the bill: Bitcoin.Tax and CoinTracking.Info. Both programs provide options for different outcomes and in general, stick with the default method to stay clear of potential IRS trouble. (See How Cryptocurrency Investors Can Avert IRS Attack).

Coin exchanges do not provide taxable income reports
Don’t look to your coin exchange for much help with tax reporting. They don’t keep cost-basis information and are unable to give the users online tax reports. A coin is not a “covered security” for Form 1099-B issuance, so coin investors and the IRS don’t receive a 1099-B.

Coin investors are responsible for generating their accounting and tax reports. With uncertainty on tax treatment due to lack of sufficient IRS guidance, many coin traders wind up under-reporting taxable income on coin transactions. In most cases, it may be inadvertent, but sometimes, it’s willful. Using accounting software shows an attempt to be compliant.

The IRS is pursuing coin investors
The IRS served a “John Doe” summons (the worst kind) to the most significant coin exchange, Coinbase, to obtain its customer list for investors and traders with coin transactions worth more than $20,000. The IRS calculated that less than 900 taxpayers reported capital gain or losses on coin transactions in 2015, an alarmingly small number.

With coin prices skyrocketing in 2017, the U.S. Treasury wants tax revenues — its share of the windfall profits. Perhaps this is the reason they labeled coin “intangible property” rather than currency. There wouldn’t be any taxable income or loss on the use of money.

Bitcoin.Tax
I spoke with the owner of Bitcoin.Tax (BT), Colin Mackie, who described his program to me in detail. Here’s what I learned.

“Most coin exchanges allow a download of account history as a CSV file, and then BT imports it,” he said. “BT also has an API solution that works with some coin exchanges like Coinbase and Gemini, to download directly into BT.”

Mackie said the program produces various downloads for capital gains, such as Form 8949 PDFs, 8949 attachable statement, TurboTax import, TaxACT import, and plain CSV.

“For income, it’s a summary of income and mining per coin as a CSV,” he said. “For Section 1031 like-kind exchanges, it’s a statement of the appropriate lines from the Form 8824, one row per trade.”

The BT default method is to report capital gains and losses on coin-to-coin trades like trading Bitcoin for Ethereum. I suggest our clients use this default treatment to be compliant with IRS rules. The program offers an option to defer income and loss on all coin-to-coin trades by treating those trades as Section 1031 like-kind exchanges. If you select the like-kind exchange option, the BT program delays all taxable income or loss on these trades for the entire year until the user sells the coin for currency. Mackie said some accountants requested this option, but I strongly advise our clients against it. (See Cryptocurrency Traders Risk IRS Trouble With Like-Kind Exchanges.)

Mackie recommends BT users to pay careful attention to hard fork transactions, such as when Bitcoin distributed Bitcoin Cash.

“The coin exchange shows an addition to coin balances for the hard fork distribution, but some don’t include the new coin received in trade activity,” he said. “Sometimes BT picks it up automatically. Otherwise, it requires the user to add the new coin manually. The user can enter the new coin in as income using the daily price on the fork date. But, users also have the option to enter zero for cost basis.”

Sometimes a user doesn’t get a constructive receipt of the new coin, or the new coin doesn’t have a trading price on the day received. Report it as taxable income when accepted if you can determine it’s value. (See How To Report Bitcoin Cash And Avoid IRS Trouble.) BT offers a wide selection of accounting methods, which it calls basis methods, and I am not sure all of them will pass muster with the IRS. BT offers FIFO, LIFO, average cost, and specific identification.

Mackie says the specific identification method “uses strategies, so the user may select the lowest cost, highest cost, or closest cost, where the program finds the best match to minimize capital gains.” That sounds like too much cherry picking after year-end. I think users should use acceptable accounting methods and select them in writing before the year commences.

I suggest our clients use FIFO to stay out of harm’s way with the IRS. This program feature of greater choice of basis method naturally leads to more income deferral and that will attract more IRS attention.

All that being said, I think BT is an inexpensive accounting solution that can work well for American taxpayers, provided they stay clear of the non-compliant options to defer income. Be sure that the program captures all transactions from the coin exchange.

BT is free up to 100 transactions, and it charges $19.95 per year when users exceed 100 entries.

CoinTracking.Info
CoinTracking.Info is another accounting solution to consider. I spoke with CoinTracker founder and CEO Dario Kachel to learn more about this program. According to Kachel, CoinTracking is the only service with current and historical prices for all 4,878 coins on the market.

RG: Does CoinTracking (CT) generate a capital gains and losses report for American coin investors in compliance with U.S. tax law?

DK: Yes, it does. CoinTracking creates U.S. compliant tax reports such as Capital Gains And Losses on Form 8949, Other Income Reports, Gift and Donation Reports, Lost and Stolen Reports, and Closing Position. Reports can be exported in many formats like Excel, CSV, PDF and even in standard forms like Form 8949, Statement for the IRS, TaxACT, and TurboTax.

RG: Does CT account for all coin transactions, including coin-to-currency trades, coin-to-coin trades, receipt of coin in a hard fork or split transactions, and each time a coin investor purchases goods or services using a coin?

DK: Yes. We support all your mentioned transactions, which is necessary for a correct capital gains report. Also, we handle mined coins, income (e.g., a salary in cryptos), gifts, donations, and lost or stolen coins.

RG: On coin-to-coin trades, like trading Bitcoin for Ethereum, does CoinTracking report a capital gain on the imputed sale of Bitcoin?

DK: Yes it does. All coin-to-coin trades will be calculated based on the cost basis and the proceeds value of the cryptos at the time of the transaction converted in USD or any other FIAT currency.

RG: On coin-to-coin trades, does CT offer the user an option to use a “like-kind-exchange” to defer the capital gains income?

DK: The option for like-kind calculations on CoinTracking is already in progress, and we will release it in December 2017. But as you said, coin investors do not qualify for like-kind exchanges, and there are no other countries officially supporting like-kind calculations (that we know of at this moment).

RG: For coin forks or splits, does CT account for the receipt of the new coin and report its fair market value or initial trading price as income? Does the program report other income or capital gains income?

DK: There are two ways (for our program) to calculate forked coins. The easy way is to figure them with their fair market value. The other way is to set the cost basis of both coins on the date of the fork depending on the coin distribution. For example, the BTC/BCH split was a 90:10 split. This would mean, that all your new BCH coins would receive a cost basis of 10% of your BTC cost basis.

RG: In How To Report Bitcoin Cash And Avoid IRS Trouble, I suggest two options, too.

RG: Do you give the user the choice of accounting method after-the-fact, so they cherry pick which is best for them in a given tax year? (We frown upon that practice as pointed out in my last blog post, How Cryptocurrency Investors Can Avert IRS Attack.)

DK: Yes, users can change the accounting method as often as they like. We also provide an instant gain calculator, where users can estimate their gain/loss and tax even prior the sale of assets.

CT’s Website states that it offers the various accounting methods including FIFO, LIFO, HIFO, and LOFO.

CT is free to use for up to 200 transactions, and it charges $325 “for lifetime use,” when users exceed 200 entries. “CT also offers more imports than other providers, margin trades, lending and borrowed coins,” says Kachel.

Coin investors and traders face a minefield of IRS trouble on a wide selection of tax accounting issues. Non-compliance is rampant, and the IRS is on the case. Put your best foot forward by using one of these accounting solutions and don’t use the features that can get you into trouble like like-kind exchanges.

If you have questions, please contact us or another expert in coin taxation.

Securities Brokers Don’t Tell The Full Story About Wash Sale Losses

January 20, 2016 | By: Robert A. Green, CPA

Click to read Green’s blog post on Forbes: Securities Brokers Don’t Tell The Full Story About Wash Sale Losses

It’s an inconvenient truth for brokers that the IRS asks them to report wash sale losses on 1099-Bs differently from the way traders must report wash sale adjustments on income tax returns. Brokers are correct in preparing 1099-Bs, but incorrect in telling clients they should import 1099-Bs into their income tax filings. […] Click here. 

 

 

barrons

Thanks @twcarey for covering this tax story in Barron’s (1/23/16) “Two New Mobile Investing Apps for Millennials,” Divy introduces investing as a social exercise while Clink emphasizes regular savings. Plus, tax advice. Click here for excerpt. 

 

Don’t Solely Rely On 1099-Bs For Wash Sale Loss Adjustments

January 5, 2016 | By: Robert A. Green, CPA

Click to read Green's blog post: Wash Sale Loss Adjustments Can Be A Big Tax Return Headache

Click to read Green’s blog post: Wash Sale Loss Adjustments Can Be A Big Tax Return Headache

Broker-issued Form 1099-Bs for securities provide cost-basis reporting information, but they don’t provide taxpayers everything they need for tax reporting if the taxpayer has multiple trading accounts or trades equities and equity options.

Brokers calculate wash sales based on identical positions (an exact symbol only) per separate brokerage account. But the wash sale loss rules for taxpayers, Section 1091, requires taxpayers to calculate wash sales based on substantially identical positions (between equities and equity options and equity options at different exercise dates) across all their individual accounts including IRAs — even Roth IRAs.

The best accounting solution for generating a correct and compliant Form 8949 is trade accounting software that’s compliant with Section 1091. Don’t just rely on a Form 1099-B (exception: if there is only one brokerage account, the trading is only in equities, not equity options and there are no cost-basis adjustments including wash sale losses).

Many tax preparers and taxpayers continue to disregard Section 1091 rules, even after acknowledging differences with broker 1099-B rules. They do so at their peril if caught by the IRS.

Securities accounting is challenging
Securities brokers are making advances in tax-compliance reporting. It’s due to Congressional legislation and implementation of IRS cost-basis reporting regulations for which phase-in commenced in 2011. Phase-in is almost complete: Equity option transactions and simple debt instruments acquired on January 1, 2014 or later were reported for the first time on 1099-Bs for tax year 2014. The only cost-basis reporting item remaining to be phased-in is reporting complex debt instruments starting on January 1, 2016 or later. Tax-year 2015 1099-Bs should be the same as in 2014.

Taxpayers report proceeds, cost basis, wash sale loss and other adjustments, holding period and capital gain or loss – short term vs. long-term (held over 12 months) on Form 8949. According to the form’s instructions, taxpayers without wash sale and other adjustments to cost-basis may simply enter totals from broker 1099-Bs directly on Schedule D and skip filing a Form 8949. After all, the IRS gets a copy of the 1099-B with all the details.

But this Form 8949 instruction leads many taxpayers and tax preparers astray with taxpayers thinking they don’t have wash sales when in fact they do have many to report in compliance with IRS wash sale rules for taxpayers, which differ from IRS rules for brokers.

Form 8949 problems: apples vs. oranges with 1099-Bs
In accordance with IRS rules for brokers, a 1099-B reports wash sales per that one brokerage account based on identical positions. The wash sale rules are different for taxpayers, who must calculate wash sales based on substantially identical positions across all their accounts including joint, spouse and IRAs. With different rules for brokers vs. taxpayers (apples vs. oranges), it’s expected that in many cases broker-issued 1099-Bs might report different wash sale losses than a taxpayer must report on Form 8949. A broker may report no wash sales when in fact a taxpayer may have many wash sale losses. A taxpayer may permanently lose a wash sale loss between a taxable and IRA account, but a broker will never report that on a 1099-B. In some cases, a broker can report a wash sale loss deferral at year-end, but the taxpayer may have absorbed the wash sale loss in another account, thereby eliminating this tax problem at year-end.

This problem of different rules on wash sales for brokers vs. taxpayers is still widely unknown by many taxpayers and tax preparers. Far too many continue to omit Form 8949 or file an incorrect Form 8949 relying solely on broker 1099-B reporting when they should be using securities trade accounting software to properly calculate and report wash sale loss adjustments.

A predicament for some tax preparers who do understand the problem is that calculating wash sales correctly leads to un-reconciled differences between Form 8949 and 1099-Bs. Some tax preparers don’t want to draw attention to those differences, fearing IRS notices generated from IRS 1099-B automated matching programs. It’s ironic that the mission of Congress in cost basis legislation was to “close the tax gap” providing more opportunities for matching 1099-Bs, but it may lead to a mess of un-reconciled differences. To better close the tax gap, Congress should realign broker and taxpayer wash sale rules to be the same.

There is one scenario where a taxpayer can solely rely on a 1099-B and skip filing Form 8949 by entering 1099-B amounts on Schedule D: when the taxpayer has only one brokerage account and trades equities only with no trading in equity options, which are substantially identical positions. Plus, the taxpayer must not have any wash sale loss or other adjustments. In that narrow case, there are apples vs. apples — only one account and substantially identical is the same as identical.

This problem of apples vs. oranges is biggest for individuals who tend to have multiple accounts. There is a solution for traders who qualify for TTS. Trade in an entity and elect Section 475 MTM, which is exempt from wash sale rules. Keep investment accounts with far less wash sale loss activity on the individual level.

Section 1091 wash sale rules
Per IRS Publication 550: A wash sale occurs when you (a taxpayer) sell or trade stock or securities at a loss and within 30 days before or after the sale you:

  • Buy substantially identical stock or securities,
  • Acquire substantially identical stock or securities in a fully taxable trade,
  • Acquire a contract or option to buy substantially identical stock or securities, or
  • Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

Wash-sale rules differ between brokers and taxpayers
IRS regulations require brokers to calculate and report wash sales per account based on identical positions (it’s reiterated in Form 1099-B instructions). Here is an example of broker rules: an account holder sells 1,000 shares of Apple stock for a loss and buys back 1,000 shares of Apple stock 30 days before or 30 days after. That’s a wash-sale loss deferred (added) to the replacement position cost-basis. But, if the account holder buys back Apple options instead of Apple stock, according to broker rules it’s not a wash sale because an option is not “identical” to the same company’s stock. Broker computer systems are programmed to calculate wash sales based on an identical symbol, and stock and options and options at different exercise dates have different symbols.

IRS regulations for Section 1091 require taxpayers to calculate wash sales based on “substantially identical” positions. That’s very different from the rule for brokers that require “identical” positions. This can be a big problem or challenge for active traders who trade stocks and options, or just options but with constant changes in exercise dates. Starting in 2014, 1099-Bs included equity options for the first time.

Many brokers report “disallowed wash sales for the year” on 1099-Bs rather than “actual wash sales” at year-end. This causes confusion and anxiety for many taxpayers, who draw the wrong conclusion and may think they have a huge problem at year-end, when they may not. The “disallowed wash sales for the year” number may count the same wash sale over and over throughout the year. What counts more is what wash sales are deferred at year-end, and what ones were permanently lost to IRA accounts.

Don’t get into trouble with the IRS
Many traders and local tax preparers who are not that savvy to the wash sale rules may leap to import 1099-Bs into TurboTax or choose to enter totals directly on Schedule D, omitting Form 8949, but they will probably not comply with Section 1091. In effect, they are using broker rules and unknowingly or willfully disregarding Section 1091. While tax preparers may be covered for malpractice, they will have Circular 230 penalties and ignorance is not an acceptable excuse.

Consider a Section 475 election
Business traders qualifying for TTS are entitled to elect Section 475 mark-to-market (MTM) accounting elected on a timely basis, which exempts them from wash sale loss adjustments and the capital loss limitation. Section 475 business trades are not reported on Form 8949; they use Form 4797 Part II (ordinary gain or loss). Although Section 475 extricates traders from the compliance headaches of Form 8949, it does not change their requirement for line-by-line reporting on Form 4797. We recommend trade accounting software to generate Form 4797. If you elect Section 475, you’ll need that software to calculate your Section 481(a) adjustment, too. (Learn more about the Section 481(a) adjustment in Green’s 2016 Trader Tax Guide Chapter 2.)

Accounting software and services for traders
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 need a specialized securities trade accounting program and/or accounting firm, or in limited cases brokerage firm reporting may be sufficient. On our Website accounting services page, learn more about trade accounting software. Choose our professional accounting service using this software.

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.

Frequently Asked Questions (FAQs) On Trader Tax

February 19, 2015 | By: Robert A. Green, CPA

How are securities taxed?
Securities traders need to watch out for higher tax rates, wash sales, capital-loss limitations and accounting challenges. Realized transactions in securities are reported trade by trade (or line by line) on Form 8949, which feeds into Schedule D where short- and long-term capital gains rates apply. Click here to see what’s included in securities and to learn more. Visit the Tax Treatment section for tax guidance on all sorts of trading instruments.

How should I handle wash sales on securities?
See our separate FAQs on wash sale losses.

How are Section 1256 contracts taxed?
Section 1256 contract traders enjoy lower 60/40 tax rates, summary reporting, and no need for accounting. (The 60/40 rates mean 60% is taxed at the lower long-term capital gains rate and 40% is taxed at the short-term rate, which is the ordinary tax rate.) Section 1256 contracts are marked-to-market (MTM) on a daily basis and reported on Form 6781. MTM means you report both realized and unrealized gains and losses at year-end. Click here to see what’s included in Section 1256 contracts and to learn more.

What is Section 475 and can that election help me?
Section 475 MTM allows qualifying business traders to deduct trading losses in the current tax year as ordinary business losses, without capital loss limitations or wash sale loss adjustments. Short term capital gains are taxed at the ordinary rate, so taxes are the same on trading gains, but Section 475 is much better on trading losses — we call it “tax loss insurance.” GreenTraderTax recommends Section 475 for securities, but not for Section 1256 contracts where you would otherwise forgo lower 60/40 tax rates. Click here to learn more about Section 475.

Can you request a 1099B based on using Section 475?
Brokers are supposed to prepare Form 1099Bs for the everyman, not based on a taxpayer’s election or other facts and circumstances. How can a broker know for sure that a trader elected Section 475 on time and or is entitled to use Section 475, which is conditional on qualifying for trader tax status?

Can I deduct my trading-related expenses on my tax return?
Deductibility is based on tax status: whether you qualify for trader tax status (business treatment) or must use the default investor tax status (investment treatment).

Individual investors are permitted to deduct Section 212 investment expenses related to the production of investment income. Investment expenses exclude home-office, education, and Section 195 startup costs. There are many limitations for investment expenses, deductible as miscellaneous itemized deductions on Schedule A including the 2% AGI threshold, Pease limitation, listed property rules, and AMT preferences.

Business traders qualifying for trader tax status are able to deduct all trading expenses, including home office, education, and Section 195 startup costs, from gross income. Sole proprietor traders report business expenses (only) on Schedule C, and trading gains and losses are reported on other tax forms. An election is not required for claiming business expense treatment. Click here to learn how to qualify for trader tax status. Click here to learn more about business expense treatment.

Are brokerage commissions tax deductible?
Yes, but they are not separately stated tax deductions. Rather, commissions are part of your trading gain or loss — an adjustment to proceeds and cost-basis.

Do I need to fill out a Form 8949 for my securities trades?
Casual investors might have no wash sale adjustments or other cost-basis adjustments and just one securities brokerage account with a few equity transactions. They may qualify to attach their 1099B and skip inclusion of a Form 8949. Active traders won’t qualify for this short cut.

The cost-basis rules are almost fully phased in. Options and less complex fixed income securities acquired on Jan. 1, 2014 or later are reportable for the first time on Form 1099-Bs for 2014. Click here to learn more about IRS cost-basis reporting and Form 8949.

Where can I learn more about trader tax matters, including entities, retirement plans, Obamacare taxes, compliance tips, and more?
In Green’s 2015 Trader Tax Guide.

I prepared these FAQs for an online broker catering to active securities traders. 

 

Frequently Asked Questions (FAQs) On Wash Sale Losses

| By: Robert A. Green, CPA

Wash sale losses are a major source of confusion for taxpayers and brokers come tax time, so we answered several FAQs to help.

What’s the best solution for reporting wash sale losses correctly?
Trader tax accounting software that downloads all purchase and sale transaction history and calculates wash sale losses according to taxpayer rules recapped below. In most cases, taxpayers can’t solely rely on 1099Bs or broker profit and loss reports for reporting wash sales. GreenTraderTax recommends software to calculate wash sales across all your accounts and for generating a correct Form 8949. You need to reconcile Form 8949 to 1099Bs and explain the differences as best you can. Click here to learn about GreenTraderTax’s accounting service for securities traders.

What are wash sale losses?
Per IRS Pub. 550, “A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: buy substantially identical stock or securities; acquire substantially identical stock or securities in a fully taxable trade; acquire a contract or option to buy substantially identical stock or securities, or acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.”

The IRS wash sale loss rules (Section 1091) are written to protect the U.S. Treasury against taxpayers taking “tax losses” at year-end to lower tax bills while they get right back into the same positions. The IRS views that as a tax loss but not an economic loss and much of the tax code prevents that from happening.

Wash sale loss adjustments defer losses to the subsequent tax year, where a taxpayer hopefully can utilize that loss. However, if you trigger a wash sale loss with an IRA, you permanently lose the wash sale loss.

Do I have to account for wash sale losses?
Yes, if you trade securities including equities, equity options, ETFs, narrow-based indices (made up of nine or fewer securities), and bonds. Click here to learn more about securities.

What’s exempt from wash sale losses?
Wash sales do not apply to Section 1256 contracts including futures, broad-based indices, and options on futures since they are marked-to-market (MTM). That’s economic reporting and there’s no way to defer wash sale losses. Click here to learn more about Section 1256 contracts.

Business traders with a Section 475 MTM election are exempt from wash sale loss reporting on their business trading positions. Consider a timely 2015 Section 475 election to convert 2014 wash sale loss deferrals on business positions into ordinary losses on Jan. 1, 2015. Click here to learn more about Section 475. Existing individuals and partnerships must file a Section 475 election by April 15 and S-Corps by March 15.

Where do I report wash sale loss adjustments?
Report wash sale loss adjustments on Form 8949 (instructions), along with other cost-basis reporting. Learn more about cost-basis reporting in the Green Trader Tax Center.

Do brokers report wash sale loss adjustments on Form 1099B?
Yes, but in compliance with IRS rules for brokers which differ from IRS rules for taxpayers. In most cases, taxpayers need to do additional work on wash sale loss reporting.

How do broker and taxpayer rules differ on wash sales?
Brokers calculate wash sales based on identical positions (an exact symbol only) per brokerage account. Section 1091 requires taxpayers to calculate wash sales based on substantially identical positions (between stocks and options and options at different exercise dates) across all their accounts including IRAs — even Roth IRAs.

What is a substantially identical position?
Apple stock and Apple options are substantially identical, but Apple stock and Google stock are not substantially identical.

Are options subject to cost-basis reporting and wash sale loss adjustments?
Yes, IRS cost-basis reporting rules phased-in options purchased on or after Jan. 1, 2014. Brokers won’t report a wash sale loss between a stock and an option, but taxpayers must do so. Options at different expiration dates have different symbols, so they are considered substantially identical.

Can I rely on my 1099-B for reporting wash sale loss adjustments?
Only if you have one brokerage account trading equities. If you trade stocks and stock options, or just stock options and/or have multiple brokerage accounts, you can’t rely on brokerage firm Form 1099-Bs for reporting wash sale losses correctly because there will be differences in application of taxpayer rules on substantially identical positions.

Are brokerage firm profit and loss reports similar to 1099Bs?
Yes, brokers use the same accounting for the 1099B and their profit and loss reports. When brokers suggest downloading a 1099B into TurboTax, they really mean downloading their profit and loss report. Those P&L reports account for wash sales based on broker rules, not taxpayer rules.

Do I have to worry about my IRA accounts in my wash sale loss calculations?
Yes, as recapped in IRS Pub. 550 above, Section 1091 includes all types of IRAs. It’s a catastrophic mistake to trigger a wash sale loss in your IRA since you will never get that tax loss benefit as it won’t reduce distributions in retirement for a traditional IRA. It’s wise to avoid trading substantially identical positions between an IRA and your taxable accounts.

What accounts are included in the wash sale loss analysis?
It goes by taxpayer identification number. If you are married filing joint, make sure to include each spouse’s separate, joint, and IRA accounts.

Are entity accounts included in the wash sale loss analysis?
Maybe. Although Section 1091 rules do not include your entity accounts, Section 267 related party rules can drag your entities into the wash sale loss analysis. Case law can apply Section 267 related party transaction rules in the event a trader plans to avoid a wash sale loss between his entity and individual accounts. If the related party transaction “is purely coincidental and is not prearranged” Section 267 law does not apply. If Section 267 applies it can lead to wash sale loss deferral or losing the wash sale loss permanently. 

Where can I learn more about wash sales?
Read the GreenTraderTax blog “How will you handle wash sale losses on securities this tax season?” and watch the related Webinar recording.

I prepared these FAQs for an online broker catering to active securities traders. 

How Will You Handle Wash Sale Losses On Securities This Tax Season?

January 23, 2015 | By: Robert A. Green, CPA

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If you actively trade equities and equity options and or securities in more than one account, unless you use proper software on all your individual taxable and IRA accounts, you will probably handle wash sales wrong and under-report or over-report your taxable income. In these cases, you can’t solely rely on 1099-B reporting because brokers use a different set of tax compliance rules than taxpayers in calculating and reporting wash sale losses.

The IRS cost-basis reporting saga continues
Accounting for trading gains and losses is the responsibility of securities traders; they must report each securities trade and related wash-sale adjustments on IRS Form 8949 in compliance with Section 1091, which then feeds into Schedule D (capital gains and losses). Form 8949 came about after the IRS beefed up compliance for securities brokers starting in 2011, causing headaches, confusion and additional tax compliance cost. Congress found tax reporting for securities to be inadequate and thought many taxpayers were underreporting capital gains. The cost-basis rules are almost fully phased-in. Options and less complex fixed income securities acquired on Jan. 1, 2014 or later are reportable for the first time on Form 1099-Bs for 2014. Inclusion of complex debt instruments on 1099-Bs is delayed until Jan. 1, 2016.

Broker-issued securities Form 1099-Bs provide cost-basis reporting information, but they often don’t provide taxpayers what they need for tax reporting. For example, brokers calculate wash sales based on identical positions (an exact symbol only) per separate brokerage account. But Section 1091 requires taxpayers to calculate wash sales based on substantially identical positions (between stocks and options and options at different exercise dates) across all their accounts including IRAs — even Roth IRAs.

Taxpayers report securities proceeds, cost basis, adjustments, holding period and capital gain or loss – short term vs. long-term (held over 12 months) on Form 8949. According to the form’s instructions, taxpayers without wash sale and other adjustments to cost-basis may simply enter totals from broker 1099-Bs directly on Schedule D and skip filing a Form 8949. After all, the IRS gets a copy of the 1099-B with all the details.

But, there is a protracted ongoing problem for many taxpayers with securities sales. For 2014 tax reporting, many 1099-Bs may not report wash sales or other cost-basis adjustments leading taxpayers or their tax preparers to choose the short-cut option: to enter totals on Schedule D and omit the headache of preparing a Form 8949. But, we know very well that taxpayers are supposed to calculate wash sales differently from brokers, and there could be wash-sale adjustments that taxpayers should make on Form 8949, which probably changes the net capital gain or loss amount.

Section 1091 wash sale loss rules for taxpayers
Per IRS Publication 550: A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

  • Buy substantially identical stock or securities,
  • Acquire substantially identical stock or securities in a fully taxable trade,
  • Acquire a contract or option to buy substantially identical stock or securities, or
  • Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

An example of how wash-sale rules differ between brokers and taxpayers
IRS regulations require brokers to calculate and report wash sales per account based on identical positions (it’s reiterated in Form 1099-B instructions). Here is an example of broker rules: an account holder sells 1,000 shares of Apple stock for a loss and buys back 1,000 shares of Apple stock 30 days before or 30 days after in that same account. According to the 1099-B, that’s a wash-sale loss deferred (added) to the replacement position cost-basis. But, if the account holder buys back Apple options instead of Apple stock, according to broker rules it’s not a wash sale because an option is not “identical” to the same company’s stock – however the taxpayer must report it as a wash sale. Broker computer systems are programmed to calculate wash sales based on an identical symbol, and stock and options and options at different exercise dates have different symbols. In that same example, if the taxpayer bought back Apple stock in a separate account, including an IRA, the broker would not treat it as a wash sale, but according to Section 1091, the taxpayer must treat it as a wash sale.

Don’t assume that substantially identical positions are worse for wash-sale calculations; they could actually be better. Subsequent transactions with profit can absorb prior wash sales before year-end, which can fix a wash-sale problem. So a gain on an option can absorb a wash-sale loss on a stock. Note that Apple stock and Apple options are substantially identical, but Apple stock and Google stock are not substantially identical.

Ways to avoid Form 8949
Business traders qualifying for trader tax status are entitled to elect Section 475 mark-to-market (MTM) accounting elected on a timely basis. Section 475 business trades are not reported on Form 8949; they use Form 4797 Part II (ordinary gain or loss). Although Section 475 extricates traders from the compliance headaches of Form 8949 (and Section 475 trades are exempt from wash sale rules), it does not change their requirement for line-by-line reporting on Form 4797.

Form 8275-R disclosure
If you or your local tax preparer decide to cut corners and disregard Section 1091 taxpayer rules for calculating wash sales across all accounts based on substantially identical positions — choosing instead to rely on broker 1099-B reporting in spite of known broader wash-sale conditions (explained in Chapter 4) — then you need to “disclose items or positions that are contrary to Treasury regulations” on Form 8275-R included with your tax return filing. We asked a leading malpractice-insurance carrier for tax preparers about this issue and they said, “there is coverage for regulatory inquiries but not if the firm is investigated for preparer penalties.” Whether you knowingly or ignorantly cut corners relying on 1099-Bs for active securities traders, it’s a circular 230 infraction and ignorance is not an excuse. Use our guides and suggestions to do it right.

Software for wash sales
When you consider a securities trade accounting software and Web-based solution, ask the vendor if they calculate wash sales based on Section 1091 and if not, you may want to skip that solution.

TurboTax ads say they make taxes simple and they imply you can just import your 1099-B. You’ll spend a lot of time finding their small fine print about having to make Section 1091 adjustments on your own.

Don’t tackle this minefield on your own, get professional help
Every case is different and our CPAs will look for ways to work with what you provide us, and in some cases, we can make manual adjustments. For example, if you don’t have open wash sales at year-end, we may be able to find ways to generate proper tax forms using 1099Bs, broker tax reports, and software solutions that you provided to us. Green NFH also offers a securities trade accounting service using proper software to be fully compliant with Section 1091.

We used several excerpts from Green’s 2015 Trader Tax Guide for this blog. 

Caution, downloading securities Form 1099-Bs into TurboTax often leads to incorrect tax filings

March 4, 2013 | By: Robert A. Green, CPA

By Robert A. Green, CPA and Darren Neuschwander, CPA

April 10, 2013 postscript: A securities Form 1099-B often has an amount listed in box 5 “wash sale loss disallowed.” For an active trader, it’s typical to see a large number in box 5, but don’t be alarmed by that amount. The box 5 amount represents wash sale losses disallowed throughout the entire year. It’s not the amount of 2012 wash sale losses that are deferred to 2013, which amount is generally far less or even zero. This latter amount is what taxpayers are most interested in as it’s the amount that affects their tax liability. The box 5 number may count the same deferred wash sale loss over-and-over again as the wash sale loss is kicked down the road in active trading throughout the year. The same wash sale loss is added to cost basis over-and-over again, too. The box 5 amount is like the below example for “wash sale loss disallowed for the year.” 

March 12, 2013 postscript: We added new content under the heading “Potential wash sales” toward the bottom of the blog to better explain this term.

March 13, 2013 TradeLog Blog Tip: Important Functions for Option Traders

We were quoted on this topic in the Wall Street Journal article ”When Your Broker ‘Outs’ You” (Tax Report), By Laura Saunders (March 1, 2013). Excerpt: Check 1099-Bs for mistakes. Robert Green, an accountant who heads GreenTraderTax, a tax preparer for more than 1,000 investors, urges taxpayers to double-check brokerage cost-basis reports against their own records. “Often the 1099-Bs don’t match trading logs,” he says, especially for frequent traders. In some cases, he has seen income over- or understated by $10,000 or more. Problems arise most frequently with wash-sale reporting, he says. Investors subject to the new reporting should think twice before filing early, says Mr. Green’s partner, Darren Neuschwander. Last year, some clients received five corrected versions of the same 1099-B, he says. Early indications are there will be many corrected forms this year, too, he adds. 

Many taxpayers and tax preparers are taking a dangerous short cut on their 2012 tax return preparation. They are downloading brokerage firm “profit and loss” reports used to prepare securities Form 1099-Bs into TurboTax and other consumer tax preparation software programs. While this sounds like it would ease the tax preparation process and lead to better tax return accuracy, it’s actually a bad idea.

Securities 1099-Bs are apples and your tax return is oranges
Securities brokerage firm profit and loss reports and their Form 1099Bs are prepared by brokerage firm accountants and IT people to meet the brokerage firm’s tax compliance rules with the IRS. As it turns out, the IRS rules for taxpayers are very different from brokerage firm rules. Doesn’t that sound incredulous? Aren’t 1099s supposed to be tax information statements sent to clients and the IRS — statements taxpayers can rely on for their tax preparation? It turns out that is not always the case. While it is with Section 1256 contracts, W-2s and 1099-INT (interest), it’s not with 1099-Bs for securities. There were many errors on 2011 securities Form 1099-Bs; we are waiting to see if 2012 1099-Bs are better. Stay tuned for our updates coming soon.

How did this mess happen?
Before 2011, Form 1099-Bs for securities reported proceeds on equities to the IRS, and nothing else (including but not limited to cost-basis, wash sales and options). Lots of taxpayers conveniently omitted options and wash sale loss deferrals at year-end, and they overstated cost basis on appreciated stock received by gift where they need to use the donor’s cost basis.

In 2008, Congress instituted mandatory “cost-basis reporting” for brokers to implement on their 1099-Bs starting with 2011, with phase-in through 2014. Now brokers report a lot more tax information to the IRS, which will rein in the tax cheats. But where does that leave honest taxpayers who need to comply with these onerous cost-basis reporting rules written for tax cheats? Honest taxpayers are stuck between a rock and a hard place! They can either rely on 1099-Bs and potentially botch their taxable income/liability, or consider the 1099-B probably incorrect and report accurate taxable income. Even if brokers followed all the IRS rules, their 1099-Bs would in many cases be wrong for taxpayers because of apples and oranges in the rules. Shouldn’t these IRS rules be recalled and fixed?

Online brokers botched 1099-Bs in 2011
Full-service Wall Street bank brokers have handled realized gain and loss reports reasonably well for decades, but they did not account for wash sales in the past. They weren’t caught on their heels with the IRS cost-basis reporting rules. Even now, they still can’t calculate wash sales across multi-brokerage firm accounts.

But online brokers are struggling with IRS cost-basis reporting and many are still botching the rules. To be fair, we haven’t seen a large crop of 1099-Bs yet for 2012, but we aren’t expecting huge strides of improvement over 2011. We think many brokers are still going their own way with their IT people and we expect vastly different reporting and layout from different online brokers causing confusion for taxpayers and tax preparers.

Wash sales are one of the biggest culprits
One of the biggest causes of divergent reporting are wash sale losses. If you reenter trade 30 days before or after selling a trade at a loss, it’s a wash sale loss deferral. You need to report that wash sale on Form 8949 and also add it to the cost basis of the position that triggered the wash sale.

Brokers report wash sales based on “identical positions” on a “per account” basis. Due to the phase-in rules starting in 2011, many brokers only picked up wash sales on 2011 securities purchased, not wash sale deferrals carried over from 2010.

But the IRS requires taxpayers to calculate wash sales based on “substantially identical positions” which means between stocks and options, and options at different strike dates across all accounts in the tax identification number. Notice the glaring differences here. Identical positions vs. substantially identical positions and per account vs. across all accounts with the same id number. Taxpayers have a much broader universe to consider on wash sales and no one 1099-B can do that.

When you download into TurboTax, TurboTax doesn’t do it either. TurboTax merely relies on taxpayer input and downloads; it doesn’t calculate wash sales on its own. If the broker pushes bad 1099-B data into TurboTax and TurboTax runs with that data as is, where does that leave you, the taxpayer, on your proper tax compliance?

Substantially identical means between Apple stock and Apple options, including different strike dates. Apple stock and Google stock are not substantially identical. Its one symbol and the derivatives of that symbol, but even that’s not the full story.

Across all accounts with the same taxpayer identification number means the husband’s accounts, wife’s accounts, joint accounts and husband or wife’s IRA accounts. Many taxpayers still don’t know that an IRA can trigger a wash sale loss deferral in a taxable account, and that realized loss will be permanently lost. No broker can ever calculate wash sales across multiple brokerage accounts and they don’t even do it across various husband and wife accounts within their same brokerage firm. Wash sales aren’t always bad, though. A business trader with a capital loss limitation can convert a year-end 2012 wash sale loss deferral into an ordinary business loss on Jan. 1, 2013 by making a Section 475 MTM election for 2013.

File a correct 8949 and match the totals to 1099-Bs
Some clients want to download from their broker into TurboTax just to generate a Form 8949 with cost-basis reporting that will better match their 1099-B. They figure it will reduce the chance of audit or IRS questions. But that’s a problem for accuracy of taxable gain or loss. (The problem we are talking about is downloads of profit and loss reports, otherwise referred to as downloads of Form 1099-Bs. They are one in the same.)

We prefer to use TradeLog to handle all taxpayer rules correctly, including cost-basis reporting, downloading items not yet covered on 1099-Bs like options and much more. TradeLog downloads from brokers, but they download the actual trade history — the debits and credits matching trade confirmations on a trade date basis. TradeLog’s Form 8949 often has material differences with the 1099-B, so we enter an adjustment number so the Form 8949 totals match the 1099-B and it doesn’t awaken IRS computers. Our firm’s policy is we can’t rely on 1099-Bs for accurate tax information and we can’t rely on a TurboTax generated Form 8949. Some clients don’t like an adjustment number on Form 8949 with footnote explanation and they want to try the 1099-B download into TurboTax. In these cases, we run TradeLog too to point out differences.

Most brokers haven’t issued their 2012 1099-Bs
Most brokers have not yet issued their 2012 Form 1099-Bs for securities. They had to wait until the end of January to be certain about wash sale losses as Dec. 31, 2012, due to the 30-day rule. 1099-Bs should come late again this year and we expect many corrected 1099-Bs to be issued afterward as well. Brokers issued up to five corrected 1099-Bs for 2011 all the way up to the extended tax deadline of Oct. 15, 2012.

There is no “hard deadline” for when a corrected Form 1099-B must be issued. This IRS documenthttp://www.irs.gov/pub/irs-pdf/i1099gi.pdf (page 5) provides that “if you file a return with the IRS and later discover you made an error, you must correct it as soon as possible.”

In some cases, the securities 1099-B will be okay
In one case recently, we noticed a leading online broker did a better job on the 2012 1099-B than they did in 2011. They did wash sale calculations during the year and added wash sales to cost basis. There were no open wash sales at year-end 2012.

While the line-by-line reporting appeared reasonable — and it could be entered to a Form 8949 as such — the totals at the bottom could cause confusion and errors. The online broker showed total “wash sale loss disallowed” at the bottom of the 1099-B in the amount of $1.3 million. The realized gain and loss total showed a loss of $1.6 million. There was no guidance saying to combine all those numbers for the correct $300,000 loss for the year, and there were no open wash sale deferrals at year-end. Plenty accountants still use summary reporting (even though they should not), and these accountants could be confused with the above 1099-B totals.

TradeLog did a better job. It clearly showed the net $300,000 loss and no open wash sales at year-end. Its wash sale calculations were different during the year and that’s not an issue for this client because both the online broker and TradeLog got it right for the year overall.

For files with open wash sales and other issues, the minefield of problems just begins.

“Potential wash sales”
In our guides, blogs, videos and webinars we often use the term “potential wash sales.” For 2012 tax compliance, it’s more appropriate to paraphrase what one leading online broker writes on the bottom of its 2012 Form 1099-Bs: “total disallowed wash sale losses during the tax year.”

See the example under the heading “In some cases, the securities 1099-B will be okay” above. The Form 1099-B displays total wash-sale loss deferrals during tax year 2012 and labels it “wash-sale loss disallowed.” This total may be correct in that it adds up all wash-sale loss disallowances during the year, and the broker added wash-sale losses to cost-basis on subsequent or prior purchases within the 30-day window.

We think the large wash sale totals are deceiving to some accountants and taxpayers because brokers don’t explain it. For example, highly active traders could easily generate a total wash-sale loss deferral amount over $1 million on a small trading account. While the actual realized capital gain or loss might be small along with year-end wash sale losses, the total wash-sale loss disallowed during the tax year may be very high. In these cases, focus on the line by line details on the 1099-B and not the summary numbers.

Don’t believe us? Pin down your broker
Ask any online broker if they are willing to indemnify you for misreporting wash sales based on importing their Form 1099-B information. We would be shocked if they said they would. Ask them to give their answer in writing. They will confirm much of what we write above and lay off the tax compliance responsibility to you and your tax adviser. Well, we are your tax advisors and we just told you we have a big problem here!

Why are brokers encouraging their clients to use TurboTax to download their 1099-Bs? 
It’s a very simple answer: Brokers want clients to import their tax information rather than find unreconciled differences and potential errors through TradeLog or other software using trade history. This happened a lot in 2011 and clients overwhelmed the online brokers’ customer support lines asking for investigation and corrected 1099-Bs.

Some differences may be legitimate like corporate actions (i.e., stock splits), which TradeLog asks you to enter manually. Others are due to differences in the IRS cost-basis rules for brokers vs. clients. Other questions are about the confusing Form 8949 with covered, non-covered and other parts and boxes. Online brokers are working off tight margins with rock bottom commissions and they aren’t set up to handle this onslaught of questions on beefed up tax compliance.

Where does this leave you? 
Once again, on your own. Don’t take the short cut and download your Form 1099-Bs — with all its problems, differences and errors — into TurboTax or another consumer tax preparation solution.

Download trade history into TradeLog and consult with our TradeLog accounting experts when the results appear confusing. Run the TradeLog 1099-B reconciliation, show the gross reconciliation differences with 1099-B proceeds and cost-basis at the bottom of the Form 8949 and explain it all in the tax return footnote we provide on our blog and in Green’s 2013 Trader Tax Guide.

For all of these reasons, we are filing extensions for our securities traders. S-corporation extensions are due March 15, 2013 and individual and partnership extensions are due April 15, 2013. If you have any questions about this problem, visit our cost-basis reporting section, read Green’s Trader Tax Guide and consider a 30-minute consultation with Robert Green, CPA. You can also sign up for one hour of TradeLog accounting time with one of our TradeLog accounting experts.

Visit our cost-basis reporting section for more information.

Disclosure and disclaimer: 
TradeLog is a third-party software product owned by a third-party company Armen Computing Ltd. Green & Company, Inc. features TradeLog on its Website GreenTraderTax.com and is the number one reseller of TradeLog, for which it receives a sales commission. Green NFH, LLC CPAs prefer to use TradeLog because they want to be sure Form 8949 or Form 4797 is correct when they sign tax returns. While Green NFH, LLC CPAs and tax attorneys help Armen Computing with TradeLog, Armen Computing is the sole owner of TradeLog and is responsible for the product. Green NFH, LLC is working with TradeLog and other software companies to find a better solution to the problems laid out here.