Category: Cost-Basis Reporting

Wash Sale Losses for Traders: How to Avoid Phantom Income and Costly Tax Traps

September 10, 2026 | By: Robert A. Green, CPA

A practical 2026 guide to the 61-day window, cross-account reporting, IRA traps, year-end planning, and Section 475 MTM

This article is for active securities traders with frequent turnover, multiple brokerage accounts, options activity, or overlap between taxable and retirement accounts.

Executive Summary

Hyperactive trading in the same securities and related options can generate wash-sale loss adjustments totaling tens or hundreds of thousands of dollars—and sometimes more. Those adjustments can create phantom taxable income when losses remain deferred at year-end. In taxable accounts, the losses are usually deferred rather than lost; however, a replacement purchase in an IRA or Roth IRA can cause the tax benefit to be lost permanently.

Form 1099-B reports broker-level wash-sale adjustments generated throughout the year. Still, it does not determine the taxpayer’s complete wash-sale position or distinguish losses already absorbed in closed positions from losses still deferred in open replacement positions at year-end. Broker reporting follows limited rules, principally for covered securities with the same CUSIP in the same account. Taxpayer-level compliance may require a broader review of multiple taxable accounts, IRAs and Roth IRAs, options, short sales, and other substantially identical positions. Spouse or controlled-entity activity may also require analysis under related-party or anti-abuse principles, but it is not automatically attributed to the taxpayer under the text of Section 1091.

Active traders need multi-account, taxpayer-level trade accounting and year-end planning. GreenTraderTax and Green’s annual Trader Tax Guide use consistent practical positions to address areas where the law does not provide a complete mechanical test. Those positions are explained below.

The wash-sale adjustment reported in box 1g of Form 1099-B can be alarming. But the headline number is not the whole story.

Wash sale rules defer a tax loss rather than erase it. The deferred loss is added to the replacement position’s cost basis. It is usually deductible when the replacement position is sold in a transaction that does not trigger another wash sale. The most serious problems arise when losses remain deferred through year-end—or become permanently nondeductible because the replacement purchase is made in an IRA.

What Is a Wash Sale?

A wash sale occurs when a taxpayer sells stock or securities at a loss and, during the 61 days beginning 30 calendar days before the sale date and ending 30 calendar days after the sale date, acquires substantially identical stock or securities or enters into a contract or option to acquire them. IRC §1091(a). The rule is intended to prevent taxpayers from realizing a tax loss while quickly restoring substantially the same investment position.

The rule also applies when the taxpayer acquires substantially identical securities in a taxable exchange. Purchases of replacement shares in an IRA or a Roth IRA can also trigger the rule.

When the rule applies in a taxable account:

The current loss is disallowed.
The disallowed loss is added to the tax basis of the replacement position.
The holding period of the replacement position includes that of the position sold.
If only part of the position is replaced, the wash sale adjustment applies on a share-by-share basis to the matched quantity.

In a taxable-account wash sale, the loss is deferred rather than erased: the disallowed amount is added to the replacement position’s cost basis under IRC §1091(d), and the holding period of the position sold generally tacks onto the replacement position under IRC §1223(3). In practice, tax software applies the rules lot by lot.

A Simple Wash-Sale Example

A trader buys 100 shares for $10,000 and later sells them for $8,000, producing a $2,000 loss. Ten days later, the trader buys 100 substantially identical shares for $8,500.

The $2,000 loss is deferred and added to the replacement shares’ $8,500 purchase price, producing an adjusted tax basis of $10,500. If the trader later sells the replacement shares for $9,500 without another replacement purchase within the wash sale window, the deferred loss is released through the higher basis, resulting in a $1,000 tax loss. The replacement trade produced a $1,000 economic gain, but the higher wash-sale-adjusted basis caused the trader to recognize the correct $1,000 net tax loss across both trades.

Wash sale losses in taxable accounts are therefore usually a timing problem rather than a permanent elimination of the deduction. Repeated trading can keep moving the loss from one replacement position to the next, creating a chain that crosses December 31 and shifts the deduction into the following year. A replacement purchase in an IRA or Roth IRA can produce a different—and potentially permanent—result.

Why Form 1099-B May Not Tell the Full Story

Broker reporting is narrower than the taxpayer’s legal obligation. The IRS Form 1099-B instructions require a broker to report a wash sale when both the loss sale and replacement purchase occur in the same account for covered securities with the same CUSIP. A broker may report more, but it is generally not required to identify a replacement purchase in another account—even in another account at the same brokerage firm.

That difference creates two common problems:

Form 1099-B may omit taxpayer-level wash sales involving another brokerage account, an IRA or Roth IRA, stock and related options, different option contracts, or other substantially identical positions.
A broker’s aggregate wash-sale adjustments for the year may be large even though most of those losses were absorbed into replacement positions that were sold before year-end.

For example, a broker’s Form 1099-B might report aggregate box 1g wash-sale adjustments of $500,000 for the year. That does not automatically mean $500,000 is deferred into next year. If the trader closed the replacement positions and avoided another acquisition during the applicable wash-sale window, little or none of that amount may remain deferred at year-end. Conversely, a smaller cross-account wash sale omitted from Form 1099-B may still require a taxpayer-level adjustment.

Even if a trader sells securities in December, a January purchase can still trigger a wash sale. Avoid acquiring substantially identical property within 30 days after the loss sale; the trader may reenter on day 31.

Consider using TradeLog for taxpayer-level wash-sale calculations. It imports transactions from multiple brokerage accounts, recalculates wash sales across those accounts, and helps reconcile the results with Forms 1099-B. Importing Forms 1099-B into tax software without this broader reconciliation is a much narrower approach and can leave material wash-sale adjustments unreported.

The IRA Wash-Sale Trap Can Make the Loss Permanent

The harshest wash-sale result occurs when an individual sells stock or securities at a loss in a taxable account and, during the 61-day window, an IRA or Roth IRA acquires substantially identical stock or securities. Under Revenue Ruling 2008-5, the taxable-account loss is disallowed, and the individual’s basis in the IRA or Roth IRA is not increased under Section 1091(d). Unlike an ordinary taxable-account wash sale, the tax benefit can therefore be lost permanently.

An IRA does not report wash sales on trades occurring solely inside the retirement account because its gains and losses are not currently taxable. The danger is the interaction between the taxable loss sale and the IRA or Roth IRA replacement purchase. Revenue Ruling 2008-5 addresses IRAs and Roth IRAs; it does not decide the treatment of employer-sponsored plans such as 401(k) or Solo 401(k) plans. The ruling also does not mention other types of IRAs such as rollover IRAs and SEP IRAs.

A practical safeguard is to maintain a do-not-trade list separating securities traded in taxable accounts from positions held in IRAs and Roth IRAs. A trader might trade individual technology stocks in taxable accounts and hold diversified funds in an IRA, provided the positions are not substantially identical.

Section 475 can provide another solution for a trader who qualifies for trader tax status (TTS). For securities properly included in a valid Section 475(f) trading business, Section 1091 does not apply to losses recognized under the mark-to-market rules. The election does not cover properly identified investment securities, and traders should not assume it resolves every transaction involving an IRA or another related account. A separate trading entity with a timely Section 475 election can also help segregate business trading from investment and retirement holdings.

Stocks, Options, ETFs, and Substantially Identical Positions

Section 1091 applies when a taxpayer acquires substantially identical stock or securities, or enters into a contract or option to acquire them, during the wash-sale window. The Code does not provide a complete mechanical test for deciding when different funds or option contracts are substantially identical.

The technical standard. Different ETFs or mutual funds are not automatically outside Section 1091 merely because they have different tickers, CUSIPs, or sponsors. Two unleveraged ETFs tracking the same S&P 500 index can present a substantially identical risk. The legal conclusion depends on the relevant facts and circumstances, including portfolio composition, index methodology, leverage or inverse exposure, investment objective, issuer rights, and other material economic characteristics.

Consider a conservative approach by treating ETFs tracking the same stock index — such as State Street SPDR S&P 500 ETF Trust (SPY) and Vanguard S&P 500 ETF (VOO) — as substantially identical for purposes of wash-sale loss treatment. On the other hand, SPY and VOO have different legal structures, which can support a formal position that they are not substantially identical.

Options on the same underlying security raise a similar interpretive issue when their strikes, expirations, exercise terms, or contract types differ. An exact replacement of the same option contract is the clearest case. Stock-to-option, option-to-stock, and different-option replacements may require analysis of the rights, risks, and economic exposure created by the positions. Cash settlement alone does not remove a contract or option from Section 1091. Section 1091(a), (f). The conservative posture is to treat all option contracts on the same underlying stock as subject to wash sale rules.

The practical positions used for trade accounting. Active traders and preparers need consistent, administrable conventions. GreenTraderTax and Green’s annual Trader Tax Guide apply the following practical positions during the year, unless particular facts require separate treatment, paired with a more conservative safeguard specifically at year-end:

• Different index funds: For ongoing trade accounting during the year, different ETFs or mutual funds are not treated as substantially identical merely because they track the same or a similar stock index — two different S&P 500 ETFs are treated as different securities. This is an aggressive position because the IRS has not provided an explicit safe harbor for same-index funds. As a year-end safeguard, revert to the more conservative technical standard described above for any positions still open across December 31: treat same-index ETFs as substantially identical, and avoid opening a replacement position in the other same-index ETF during the wash-sale window. That protects against a later challenge that the two funds were, in fact, substantially identical.

• Stock and options: Stock and all options on the same underlying security are treated as substantially identical without requiring the strike price, expiration date, or other option terms to match. This is a conservative position and may produce more wash-sale adjustments than a contract-by-contract analysis.

These are longstanding practical accounting positions, not a change in trade-accounting methodology. They resolve uncertain areas consistently; they do not mean that Section 1091 expressly mandates either convention in every factual setting. They also go substantially further than accepting an imported Form 1099-B as complete.

Qualifying Section 1256 contracts follow their own mark-to-market and 60-percent-long-term/40-percent-short-term rules and generally are not handled under the ordinary stock-and-securities wash-sale framework. Securities futures and other derivatives require separate analysis. Section 1091(e) also contains rules for certain short-sale and securities-futures losses. Traders should separately consider the straddle, constructive-sale, and other anti-abuse rules when positions offset one another.

Do Wash-Sale Rules Apply to Cryptocurrency?

Under current federal tax law, directly held ordinary spot digital assets, such as bitcoin, are generally treated as property rather than stock or securities, so Section 1091 ordinarily does not apply. The result may differ depending on whether the asset is an ETF, a trust interest, a tokenized security, a partnership interest, a derivative, or another legal wrapper. Traders should verify current legislation before relying on crypto tax-loss harvesting strategies.

Our legal-wrapper series, scheduled for publication beginning in October 2026, will address bitcoin ETFs and other wrapped financial products in detail.

How Traders Can Break the Wash-Sale Chain at Year-End

Waiting for a February Form 1099-B is too late to prevent a wash-sale loss. Traders should review potential wash-sale deferrals before year-end and coordinate activity across all relevant accounts.

A December loss sale can still produce a wash sale if the trader acquires substantially identical positions during the following 30 days in January.

A practical year-end process includes:

Use TradeLog, the trade-accounting software we recommend for taxpayer-level wash-sale calculations across multiple brokerage accounts. Run its Potential Wash Sales Report in November and again in December so there is time to plan loss sales and avoid replacement trades in January.
Identify securities carrying the largest deferred losses and the replacement tax lots holding those losses.
Sell open replacement positions before year-end to potentially release deferred wash-sale losses, and do not reacquire substantially identical property during the applicable restricted period.
Review and, where appropriate, pause purchases in relevant taxable accounts, IRAs, and Roth IRAs during the restricted period. Include automatic purchases and option activity. Review spouse, controlled-entity, and employer-plan activity separately when related-party or anti-abuse concerns may be present.
Reconcile the year-end carryover by ticker and tax lot so the deferred basis is tracked correctly into the next year.

For example, if a trader sells Apple shares at a loss on December 20, 2026, the trader should avoid Apple shares and substantially identical Apple positions through January 19, 2027, and may reenter on January 20, 2027.

A trader does not need to stop all trading. Under the practical position described above, the trader may switch from one tech stock (Apple) to another tech stock (Google) during the restricted period.

Section 475 MTM Can Eliminate Wash-Sale Accounting for Qualified Traders

Trader tax status (TTS) by itself does not eliminate wash-sale accounting. Section 1091(a) contains an exception for a dealer in stock or securities when the loss arises in the ordinary course of the dealer’s business, but ordinary trader status is not dealer status.

Section 475 is available to a taxpayer who qualifies for TTS and makes a valid, timely Section 475(f) mark-to-market election for the securities trading business. For covered business securities, Section 475 marks open positions to market at year-end, generally treats the resulting gains and losses as ordinary, and provides that Section 1091 does not apply to losses recognized under the mark-to-market rules. The $3,000 capital-loss limitation also does not apply to those ordinary business losses. Sections 475(d)(1), 475(d)(3), and 475(f).

Section 475 is not automatic and cannot ordinarily be elected retroactively after losses occur. It does not cover properly identified investment securities. The taxpayer must make a timely election and comply with the accounting-method-change requirements, including the filing of Form 3115 when applicable. Sole proprietors generally elect by the unextended due date of the prior-year individual return; partnerships and S corporations use the unextended due date of the prior-year entity return. A new entity has a separate internal election procedure within two months and 15 days of inception.

For most calendar-year individuals, the deadline to make a 2026 Section 475(f) election passed on the unextended due date for the 2025 individual return, April 15, 2026. A trader considering Section 475 after that deadline generally is evaluating an election for the following tax year, subject to the applicable rules.

For an active securities trader who qualifies for TTS, Section 475 can provide valuable tax-loss insurance and cleaner accounting. The decision should be made before the election deadline.

Coming soon in this wash-sale series: “How TTS Traders Report Section 475 MTM Gains and Losses on Form 4797,” covering the election, accounting-method change, segregation rules, and return preparation.

Reporting Wash Sales on Form 8949

For a detailed walkthrough of Form 8949 reconciliation, adjustment codes B and M, substitute statements, and Form 8453 filing requirements, see Part 2 of this series: ‘Wash-Sale Accounting: Why Broker Form 1099-B Reporting Is Not Taxpayer Compliance.

Coming in October: Our Legal Wrapper Series

Beginning in October 2026, we plan to publish our legal wrapper series explaining why the term “security” can have different meanings under different tax provisions. Section 475 MTM uses a broader definition for TTS traders, while Section 1091 wash sales uses a narrower one. As a result, an underlying instrument might fall outside Section 1091, while an ETF, option, or other wrapper referencing that instrument might itself be treated as stock or a security under Section 475.

Bottom Line

Wash-sale losses are manageable when traders monitor them during the year, but they become expensive when ignored until tax season. The biggest risks are not the gross annual adjustment in box 1g. They are losses deferred after December 31, unreported cross-account wash sales, permanent losses caused by IRA or Roth IRA replacement purchases, and incorrect basis carried into future years.

Active securities traders should use multi-account trade accounting, coordinate taxable and retirement-account activity, and plan early enough to break the year-end chain. The longstanding practical positions used by GreenTraderTax and Green’s annual Trader Tax Guide provide a workable and consistent method for uncertain ETF and option relationships. Traders who qualify for TTS should also evaluate a timely Section 475 election for the next tax year. TTS traders under Section 475 avoid the confusion and complexity of wash sale losses in their trading activity.

Sources and Further Reading

IRC Sections 1091 and 475; Treasury Regulation Sections 1.1091-1, 1.1091-2, and 1.6045-1; Revenue Ruling 2008-5; IRS Instructions for Form 1099-B (2026); IRS Instructions for Form 8949 (2026); and IRS Publication 550 (2026).

This article is for educational purposes and does not constitute tax advice.

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

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

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.

Cost-Basis Reporting Problems and Solutions

November 20, 2012 | By: Robert A. Green, CPA

If you trade or invest in securities, you need to learn about “cost-basis reporting,” a new set of IRS rules for taxpayers starting with 2011 tax filings. Previously, taxpayers could simply enter their capital gains and losses (proceeds, cost basis and holding period) onto Schedule D of their individual income tax return. That’s no longer allowed, so 2011 and 2012 tax returns are proving to be a challenge.

Under the new cost-basis reporting regime, taxpayers must decipher broker-provided Form 1099-Bs. In tax years prior to 2011, taxpayers and their accountants could easily use a Form 1099-B to enter proceeds from each securities sale on their Schedule Ds. Taxpayers then entered their own record of cost-basis information and they were finished. Investors often looked up the original purchase price in an earlier brokerage statement and considered stock splits or other corporate actions, which are rare. Active traders generally used software like TradeLog, which downloaded all trade executions and provided an easy-to-use Schedule D-1 attachment.

You would think that when brokers entered the picture providing cost-basis information to taxpayers and the IRS on Form 1099-Bs, taxpayer compliance would be easier. You would be very wrong! (I explain this problem in an interview for MoneyShow.com: “Tax Flubs That Can Cost You Thousands“.)

Take one look at your 2011 Form 1099-B and you will see the problem. While stock proceeds may look the same as prior years, the new cost-basis information is extremely confusing. Some brokers mark cost information with quirky new codes like P (provided to the IRS), N (not provided to the IRS) and W (wash sales). Some brokers do not provide totals for the amounts they are reporting. Plus there are covered securities, non-covered securities and other. All individual trades must be entered on the new 2011 tax form 8949, which includes Parts A (proceeds and cost basis both reported to the IRS), B (proceeds reported to the IRS but not cost basis) and C (other or not reported on a 1099). Separate Form 8949s must be filed for short term and long term. Add it up: That’s up to six different categories on the Form 8949s instead of the single Schedule D required in the past. This is a huge burden and is very confusing for taxpayers.

That’s just a fraction of the problem. Many brokers are using back-office accounting solutions that may botch wash-sale reporting, since they have not focused on it much in prior years, and some are omitting 2010 wash sale cost basis deferred into 2011. Also, most brokers rushed 1099-Bs to the printer before doing an end-of-January wash-sale calculation. In addition, the rules brokers are required to follow for 1099-B reporting are different from the rules for taxpayers: Most brokers report wash sales between “identical positions” (the same symbol only), whereas taxpayers are required to report wash sales between “substantially identical positions” (such as between stocks and options). How can the IRS ask brokers and taxpayers to report wash sales differently? Even if brokers get everything right, broker-provided wash sales would still be wrong because they only report wash sales in one account, whereas a taxpayer must report them across all taxable accounts, including IRAs.(For more details, see our March 20 blog.)

Using a 1099-B for wash sale reporting is a big mistake. IRS cost-basis reporting rules state that taxpayers should not rely on 1099-Bs for tax reporting purposes. What? (Read more about this concept on our Aug 16 12 blog – Why do forex forward dealers issue 1099s, yet retail spot forex brokers do not?)

Phasing in the rules seems to be part of the problem. While the IRS phased in the new rules for brokers, it did not do so for taxpayers. The IRS is giving taxpayers the difficult job of deciphering all the inevitable discrepancies between 1099-Bs and Form 8949 results.

What should you do?
We suggest reading our blogs on this saga to understand the new IRS rules, how 1099-Bs are constructed and how you should handle Form 8949. We recommend using software like TradeLog and filing an extension.

For the 2011 tax-filing season — which ended on the extension deadline of Oct. 15, 2012 — IRS relief never came, and most brokers were not able to sufficiently correct their 1099-Bs. We filed 2011 tax returns as explained in our blogs below, and attached a suggested footnote explanation.

Aug 29 12 An update note to tax preparers and traders about incorrect 1099-Bs and 2011 tax filings

Aug 17 12 Tax Return Footnote: 2011 Form 8949 and Cost-Basis Reporting Rules

Jul 11 12 Cost-Basis Reporting Update: How To File Form 8949 With 1099-B Differences

Ways to avoid Form 8949
Business traders qualifying for trader tax status are entitled to elect Section 475 mark-to-market(MTM) accounting on a timely basis (by April 15, 2013 for the 2013 tax year). Section 475 business trades are reported on Form 4797 Part II (ordinary gain or loss) and not on Form 8949. Although Section 475 extricates traders from the compliance headaches of Form 8949, it does not change their preferred solution. Either way, traders should use TradeLog software to download their trades and calculate their required trade-by-trade gain or loss. Another way out of Form 8949 is to use an entity, which we recommend for business traders to reduce red flags on trader tax status. The IRS does notcurrently use Form 8949 on entity tax returns.

We recommend a Section 475 MTM election for business trading in securities only. We don’t recommend Section 475 MTM for Section 1256 contracts – which you are permitted to exclude from the Section 475 MTM election – so traders don’t lose lower 60/40 tax rates (currently up to 12% less). Don’t worry, Section 475 MTM is not permissible on segregated investments, so traders can enjoy tax deferral at year-end, and also hold for 12 months to generate lower long-term capital gains rates (currently up to 15%). Section 475 MTM reports both realized and unrealized gains and losses at year-end.

Be prepared for similar problems for 2012 returns
More cost-basis reporting items will be phased in for 2012 returns. Per Fidelity’s “Frequently asked questions about cost basis”: “On January 1, 2012, the second phase of the cost basis tax reporting requirements goes into effect. This next phase impacts reporting of securities eligible for average cost including mutual funds, exchange-traded funds (ETFs) classified as registered investment companies, and dividend reinvestment plans (DRIPs).” We are working on mutual fund bifurcation tax issues, and we plan to publish a separate blog on that subject soon.

We expect some brokers to compound wash sale loss problems from 2011 into 2012. If brokers only report potential wash sales in 2011 and 2012, they may not connect the years and related wash sale loss reporting problems, although that reporting is basically useless to taxpayers. Conversely, if brokers report overstated 2011 wash sales as part of 2012 cost basis, it will lead to overstating cost-basis in 2012, which then will lead to understating taxable income. We won’t know if this will happen until our CPAs start seeing 2012 Form 1099-Bs. Stay tuned.

An update note to tax preparers and traders about incorrect 1099-Bs and 2011 tax filings

August 29, 2012 | By: Robert A. Green, CPA

Many tax preparers and traders have put 2011 tax return filings on hold, awaiting corrected 1099-Bs from securities-broker clearing firms. Unfortunately, many clearing firms are struggling and they simply can’t provide a 1099-B that tax preparers can rely on. How should preparers and traders proceed, considering that 2011 extended tax returns are due Sept. 17 for pass-through entities and Oct. 15 for individuals?

Taxpayers can’t hold out for corrected 1099-Bs any longer; they probably will never come. By law, taxpayers are responsible for reporting their securities trading gains and losses correctly on Form 8949, no matter what shape their 1099-B is in. If the broker has botched the 1099-B, it may help a taxpayer seek abatement on late-filing and late-payment penalties, but it won’t excuse taxpayers from reporting their trading gains and losses and paying the taxes they owe, including interest if late.

When taxpayers receive an incorrect Schedule K-1, they can file a Form 8082 “Notice of Inconsistent Tax Treatment” when they report a different amount or different tax treatment. But Form 8082 is not necessary with botched 1099-Bs in connection with the new IRS cost-basis reporting rules.

Our firm ended the tax-filing bottleneck a month ago. It’s time to start filing 2011 tax returns and to go with the army you have. That means using TradeLog software for trade accounting and any available broker profit and loss reports if they are in good shape and they can help you double-check TradeLog.

We work with the most recent “corrected” Form 1099-B our clients received, but mostly just to reconcile the totals and explain the differences on Form 8949 and in our tax return footnote. We published an example tax return footnote for TradeLog accounting on our blog dated Aug. 17, 2012.

We know key departments of the IRS are aware of the cost-basis reporting problem, and the AICPA has asked the IRS not to issue tax notices and exams when Form 8949s and 1099-Bs don’t match up. We asked the IRS for this same relief in our Petition to Congress. But we don’t know if it will honor this request. So, in the TradeLog tax return footnote, we explain that Form 8949 totals do reconcile with Form 1099-Bs after making the adjustments. That’s why we want the last corrected 1099-B available.

Tax preparers: We suggest you use TradeLog and our footnote, and consult with us if you have questions. Otherwise, you need to resign your account. It’s not fair to keep a client waiting, because they could be hit with large penalties, interest and tax bills that don’t make any sense. See our cost-basis reporting resources for more background information.

Cost-Basis Reporting Update: How To File Form 8949 With 1099-B Differences

July 11, 2012 | By: Robert A. Green, CPA

Join noted trader tax CPAs Robert A. Green and Darren Neuschwander, Managing Members of Green NFH, LLC for their “Webinar on July 17, 2012” (or watch the recording afterward) as they discuss the latest IRS cost-basis-reporting developments for securities traders. Green and Neuschwander will discuss the below FAQs, show tax return examples, explain our rationale, and show traders and professionals how best to proceed on this challenging issue.

The background
Many securities traders filed 2011 tax extensions and they are awaiting our guidance on how to file their tax returns containing differences between trading profit and loss on Form 8949 and broker-issued 1099-Bs. The differences are sparking IRS tax exams. Most clearing firms struggled to issue multiple corrected 1099-Bs, and many of those still got it wrong. See our recent Webinar on ““Botched 1099-Bs, Form 8949 Differences, Tax Prep Tips, Extensions & MTM Elections”” (Mar. 28, 2012).

Many traders already filed their 2011 tax returns based on 1099-B reporting and overpaid their taxes by thousands of dollars. They should learn how to fix the errors and file amended tax returns to get refunds.

Wash sales are a big problem
1099-Bs grossly overstating wash sales seem to be the biggest culprit for errors — we saw this to the tune of millions of dollars on one taxpayer’s Form 8949. Oddly, many brokers inappropriately adjusted gross sales proceeds for wash sales adjustments, when they should have only adjusted cost basis. Many brokers reported ““potential” wash sales” in cost-basis, rather than actual wash sales, which are much lower.

FAQ this Webinar will address:

1. Question: Is it safe to file a 2011 individual income tax return/Form 8949 containing differences between your own trading profit and loss and amounts reported on Form 1099-Bs?

Answer: Instructions for Form 8949 ask for trade-by-trade reconciliations of proceeds and cost-basis, comparing your own accounting results with Form 1099-Bs. That’s almost impossible to do for active traders with botched 1099-Bs, which seems to be par for the course on 2011 tax filings.

The only good securities trade-accounting solution that we know of is TradeLog. While TradeLog can reconcile total proceeds and cost-basis from Form 8949 to Form 1099-B amounts, it does not have the capability to reconcile each line-by-line or trade-by-trade amount to Form 1099-B. TradeLog shows the total reconciliation difference for gross proceeds and cost-basis on Form 8949. It’s the “plug” number the IRS’s computerized 1099-B matching programs look for.

These Form 8949 unreconciled amounts vary greatly. Some are under $1,000 and others are in the millions, especially when potential wash sales versus actual wash sales are involved.

While we often have some good clues or ideas on what contributes to material unreconciled differences, we can’t be certain since it’s only a total difference rather than a line-by-line difference. It can take weeks of work to figure it out. Plus, it’s often a wild goose chase with no concrete results generated.

Rationale for our answer: Since Form 8949 instructions ask for a reconciliation of differences, we display them — no matter how big or small — on Form 8949. We use the reconciliation feature in TradeLog. Some clients and tax preparers may decide to skip the TradeLog step to avoid showing a huge reconciliation item on Form 8949, thinking that may reduce the chances of an IRS exam. We disagree, as the Form 8949 instructions ask for the reconciliation, and with that plug number, the Form 8949 will match the 1099-B when the IRS runs the computerized matching program. Not showing the reconciliation may indicate the preparer is unaware of the rules and that may cause the IRS to think the return is otherwise flawed, too.

We believe it’s a mistake to delete the plug number reconciliation difference from Form 8949. The IRS could construe it to mean a tax preparer is obstructing IRS oversight and disrespecting its new cost-basis reporting rules. That’s unwise. Bottom line, leaving in the reconciliation amount helps with matching and it complies with the rules.

2. Question: What happens if the IRS audits the trader over Form 8949?

Answer: If you’re examined by the IRS, plan to give the agent your TradeLog reports, brokerage statements, and Form 1099-B. Let the agent spend weeks comparing these documents. They will see TradeLog is correct and the 1099-Bs are sliced and diced with errors. This won’t cost the client much money or time, since the CPA does little work during the exam. The IRS can fool around on its dime and time.

If you get this type of tax notice, contact us for help. We will try to get the exam “reconsidered” and point the IRS back in the direction of the broker, who it should examine instead of the trader. This only takes a few hours of our time, so it doesn’t cost much.

3. Question: How should I deal with these unreconciled differences throughout the tax return filing?

Answer: You should highlight the differences from Form 8949 vs. 1099-B footnotes, and perhaps supporting worksheets. There’s no reason to try and bury them. The taxpayer and tax preparer should clearly state what steps they took in: doing their securities trade accounting; how they prepared Form 8949; how they reconciled with the 1099-B; and what the unreconciled differences might be — as best as they can explain it. Accountants would be foolish to try and cover up a problem or not comply with these rules. We suggest that tax preparers obtain representation or acknowledgement letters from clients about this problem and process, too, so there are no misunderstandings about scope and outcome later on.

If the unreconciled difference is under $1,000, you can probably skip long-form footnote explanations; a simple note on how you used TradeLog or other software should suffice. (TradeLog offers a footnote to use as well, explaining what it does and does not do in this regard.)

4. Question: How do I e-file a tax return with a Form 8949?

Answer: If you e-file your individual income tax return, we generally paper file the Form 8949s with attachments of the TradeLog reports and related footnotes. The transmittal form is Form 8453.

E-filings for individuals currently don’t permit PDF attachments, making the separate Form 8453 filing necessary. Although we can import TradeLog files into our software, we choose not to because there are other complications that can arise.

5. Question: Does the IRS require taxpayers and tax preparers to investigate unreconciled differences between Form 8949 and 1099-Bs? If yes, do they need to explain those differences on their tax return?

Answer: The IRS cost-basis rules call for taxpayers and tax preparers to “verify” Form 8949 to their 1099-Bs. But, verifying information like inaccurate wash sales perpetuates tax problems. The term “verify” indicates taxpayers and preparers should be sure the underlying trade information is correct, like comparing Form 8949 to actual trade confirmations. Unfortunately, 1099-Bs rarely agree with trade confirmations for 2011.

6. Question: Where do we find more information on known issues on Form 1099-Bs?

Answer: Both TradeLog and GreenTraderTax provide resources on known issues with various brokers on their 1099-Bs. “Click here”. Do your best to explain as many difference in general that you can and include that in a few sentences in the footnote. We may show some examples on the Webinar.

7. Question: Do traders have to keep pressing their brokers to correct 1099-Bs?

Answer: No, but they should try their best to do so — that earns points with the IRS.

One of our clients spent 40 hours of his time finding every individual difference and he presented all the evidence to his online broker. He forced his broker to fix every error on the 1099-B. That client’s Form 8949 now has no differences.

Few clients have the time to do this. If you find some errors, try to get your broker to issue a corrected 1099-B to narrow the unreconciled differences. But, in the end, it could prove to be frustrating, time consuming, and the broker may not cooperate. Make an attempt and document it in your footnotes.

8. Question: How can I avoid this Form 8949 mess in the future?

Answer: Consider forming an entity for business trading and investing in securities. Currently, entities don’t file a Form 8949. See our recent Webinar on ““The Best Entities for Traders and Investment Management Businesses.””

Individual business traders who elect Section 475 MTM file their trades on Form 4797, not on Form 8949. That solves the problem for business trades, but you still need Form 8949 for segregated investments. You can house both in an entity. Section 475 MTM is exempt from wash sale loss treatment. Caveat: It must be elected by April 15 of the current tax year. New taxpayers can elect it within 75 days of inception.

Or, trade futures and other Section 1256 contracts which are reported in summary fashion on Form 6781, rather than on Form 8949. Futures are not subject to wash sale treatment. See our recent Webinar on ““Tax Benefits from Trading Futures & Section 1256 Contracts.””

Commentary
Is this an example of government overreach and regulation with poor thinking? Why ask brokers to spend time and money compiling more information for IRS consumption when the aggregated information is going to be incorrect (wash sales)? Aggregation is for the old economy with manual work, not the new high tech world. The IRS could have simply asked brokers to include an annual statement in the same manner as a monthly statement, containing all debits and credits for buys and sells of capital assets. It wouldn’t have needed to phase-in the rules, causing great additional confusion.

Are local tax preparers, including CPAs, subjecting themselves to professional liability claims and IRS preparer penalties? Shouldn’t their professional liability insurance carriers insist they not take the apparent easy way out by relying on 1099-Bs? We hear most accountants start tax preparation by importing 1099-Bs into their tax software after scanning them with OCR recognition. They are baking inaccurate tax information into their cake. Verifying afterward that their tax software used the 1099-B correctly misses the point because the ingredients are wrong to begin with. We help accountants select and use the proper solutions — TradeLog and more — for this filing crisis. We are currently evaluating another software solution for finding differences and we should report on this soon.

Who should attend the Webinar?
If you trade securities, or have a client who does, don’t miss this important Webinar. This crisis is huge and most accountants, tax attorneys, brokerage firms, software providers and the media are short changing and under-reporting it. The IRS wants to close the tax gap, but, causing taxpayers to overpay taxes by perhaps a billion dollars in connection with these inaccuracies isn’t the answer. We see this huge crisis as an ethical issue for the IRS, Congress, brokers, and accountants.

Please sign our petition
We will update our Petition to Congress soon calling on the IRS to recall or repeal these poorly crafted rules. We’ll suggest that the IRS ask brokers for an annual statement of all buys and sales. Don’t ask taxpayers to file a Form 8949 until brokers have filed the annual statement on the 1099-B correctly for several years and the IRS has consumed it properly. This is a very simple data dump, and we don’t need the extra cost and confusion. The cost-basis crisis is a microcosm of the entire government vs. private section economy. Use computers to exchange data and take all the people — middle men accountants and rule makers — out of it.

We asked Congress for IRS relief in our last Petition ““Securities Traders Need Tax Relief on IRS Cost-Basis Reporting Rules”” on RallyCongress.com and through other initiatives. Please sign it today. The IRS recognizes only a fraction of the problem, and it provided fractional relief. Specifically, to delay the 2013 phase-in rules one year to 2014 for cost-basis reporting on options and debt instruments. We’re urging the IRS to rethink the rules and start over right. Is this why our tax code is an abomination of complexity?

Watch a MoneyShow video interview with Robert A. Green, CPA on this subject from the June 2012 Traders Expo Dallas: “Tax Flubs That Can Cost You Thousands”.

Consultations
If you have further questions or need our help in addressing your personal situation, consider a consultation with us. We have a summer promotion on “consultations” and “entity formation services”.

TradeLog Accounting Services
We offer “TradeLog accounting services” which include preparation of your Form 8949, dealing with the unreconciled differences as best we can in short order, and preparation of your related footnotes. If you have a local CPA, engage us to handle this difficult part of your tax return — your local CPA will really appreciate it.

Bottom line
Don’t file an incorrect tax return and over pay your taxes by thousands of dollars, due to botched wash sale reporting, or other 1099-B errors. And, don’t cause yourself an unnecessary IRS exam, either. Get informed, use the right software solutions, and get help from trader tax experts who understand the nuances of cost-basis reporting.

Form 8949: What To Do About Tax Problems For Reporting Securities Trades

June 28, 2012 | By: Robert A. Green, CPA

P.S. We expanded on this blog to include Questions and Answers for our upcoming Webinar on this subject. See our blog dated July 11, 2012.

This is an important update on the cost-basis reporting crisis, Form 8949 and dealing with botched 1099-Bs.

Join noted trader tax CPAs Robert A. Green and Darren Neuschwander, Managing Members of Green NFH, LLC for their Webinar on July 17, 2012. (or watch the recording afterward) as they discuss the latest developments and solutions for the continuing IRS cost-basis-reporting filing crisis.

The background
Many securities traders filed 2011 tax extensions and they are awaiting our guidance on how to file their tax returns containing material unreconciled differences between trading profit and loss on Form 8949 and broker-issued 1099-Bs. The IRS is very keen on these differences and it can cause tax exams. Most clearing firms struggled to issue multiple corrected 1099-Bs, and many of those still got it wrong.

Many traders already filed their 2011 tax returns based on 1099-B reporting and overpaid their taxes by thousands of dollars. They should learn what’s wrong and file amended tax returns to get refunds.

1099-Bs grossly overstating wash sales seems to be the biggest culprit for errors — we’ve seen this to the tune of millions of dollars. We may have found a tax law inconsistency in regulations versus code; the cost-basis regulations require wash sale reporting, but the Internal Revenue Code 6045(g) does not don’t require wash sale reporting, only to adjust basis for wash sales. It’s better for brokers to skip wash sales entirely, rather than report them grossly wrong on 1099-Bs. Only taxpayers have access to all of their brokerage accounts and know their own elections, which are required to calculate wash sales correctly.

Questions this Webinar will address
Is it safe to file a 2011 individual income tax return containing material unreconciled differences in cost-basis reporting? How should you present those differences on Form 8949? Should you highlight the differences with good tax return footnotes and supporting worksheet explanations, or should you try to bury the differences in the return? How should you comprise those footnotes and supporting worksheets?

Does the IRS require taxpayers and tax preparers to investigate unreconciled differences between 1099-Bs and Form 8949 and explain them on the tax return? The IRS cost-basis rules call for taxpayers and tax preparers to verify Form 8949 to their 1099-Bs. But, doesn’t verifying information like inaccurate wash sales perpetuate tax problems? Shouldn’t the term “verify” indicate taxpayers and preparers need to be sure the underlying information is correct, like comparing it to actual trade confirmations?

Is this an example of government overreach and regulation with poor thinking? Why ask brokers to spend time and money compiling more information for IRS consumption when the aggregated information is going to be incorrect (wash sales)? Aggregation is for the old economy with manual work, not the new high tech world. The IRS could have simply asked brokers to include an annual statement in the same manner as a monthly statement, containing all debits and credits for buys and sells of capital assets. They wouldn’t have needed to phase-in the rules, causing great additional confusion.

Are local tax preparers, including CPAs, subjecting themselves to professional liability claims and IRS preparer penalties? Shouldn’t their professional liability insurance carriers insist they not take the apparent easy way out by relying on 1099-Bs? We hear most accountants start tax preparation by importing 1099-Bs into their tax software after scanning them with OCR recognition. They are baking inaccurate tax information into their cake. Verifying afterward that their tax software used the 1099-B correctly misses the point because the ingredients are wrong to begin with. We help accountants select and use the proper solutions for this filing crisis. It’s TradeLog for preparing Form 8949 and some other solutions for finding and explaining 1099-B differences.

If you trade securities, or have a client who does as a tax preparer, don’t miss this important Webinar. This crisis is huge and most accountants, tax attorneys, brokerage firms, software providers and the media are short-changing and under-reporting it. The IRS wants to close the tax gap, but, causing taxpayers to overpay taxes by perhaps a billion dollars in connection with these inaccuracies is not the answer. We see this huge crisis as an ethical issue for the IRS, Congress, brokers, and accountants. Yes, we have an excellent business in fixing these problems, but we wish we didn’t have to.

We will update our Petition to Congress soon calling on the IRS to recall or repeal these poorly crafted regulations and rules. We’ll suggest to the IRS that they just ask brokers for an annual statement of all buys and sales. Don’t ask taxpayers to file a Form 8949 until brokers have filed the annual statement on the 1099-B correctly for several years, and the IRS has consumed it properly. This is a very simple data dump, and we don’t need all the mis-aggregation, confusion, red tape and extra cost. The cost-basis crisis is a microcosm of the entire government vs. private section economy. Use computers to exchange data and take all the people —middle men accountants and rule makers — out of it.

We asked Congress for IRS relief in our last Petition ““Securities Traders Need Tax Relief on IRS Cost-Basis Reporting Rules”” on RallyCongress.com and through other initiatives. The IRS recognizes only a fraction of the problem, and it provided very fractional relief. Specifically, to delay the 2013 phase-in rules one year to 2014 for cost-basis reporting on options and debt instruments. We’re urging the IRS to rethink the rules, see the flaws, recall the rules and start over right. Is this why our tax code is an abomination of complexity?

Watch a MoneyShow video interview with Robert A. Green, CPA on this subject from the June 2012 Traders Expo Dallas: Tax Flubs That Can Cost You Thousands.