Tag Archives: accounting

How To Avoid Higher Taxes On Wash Sale Losses

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Section 475 ordinary income is “qualified business income” (QBI), which makes the trader eligible for a 20% QBI deduction, providing the trader is under the taxable income thresholds for a “specified service business.” QBI excludes capital gains, interest, and dividend income, which includes capital gains from WS loss phantom income.

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

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

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

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

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

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

Thank both of you

March 15, 2017 | By: Robert A. Green, CPA

We’ve like to Thank both of you (Star Johnson CPA and Christie Kam CPA) for your dedication and hard work on xx LLC K-1.  It was our first experience and at times very challenging for us. But thanks to both of you for your patience and dedication.

fantastic outfit

October 12, 2016 | By: Robert A. Green, CPA

5 stars. Quick, and Christy Kam (CPA) makes getting my Schedule D easy. You are a fantastic outfit, so glad you were recommended to me (by Online Trading Academy).

Short Sellers Should Not Rely On Brokers For IRS Reporting (Recording)

September 19, 2016 | By: Robert A. Green, CPA

Traders are on their own when it comes to tax compliance for short sales. Brokers don’t report constructive sales on appreciated financial positions on 1099-Bs, and many miscategorize stock borrowing fees as interest expenses.

Join trader tax expert Robert A. Green, CPA as he explains complicated tax rules for short sale transactions and expenses:

- Short sales against the box.
- Constructive sales on appreciated positions.
- Special rules for short-term vs. long-term capital gains and losses.
- Using tax compliant software.
- Dividends and “payments in lieu” of dividends.
- Stock borrow fees vs. interest expenses.
- Investors face limitations on deductions.
- Traders with trader tax status & Section 475 bypass short sale problems.
- Tax compliance tips and examples.

Short Selling

| By: Robert A. Green, CPA

The essence of trading is buying and selling financial products for income. If you think the asset will rise in value, buy first and sell afterward — this is what’s known as a “long position.” If you want to speculate on the asset declining in value, borrow the security to sell it first, and buy it back later to close the short position — this is “selling short.” (There are other ways to speculate on market drops like buying put options or inverse ETFs, both of which are long positions.)

There are two types of short sales: (1) a short sale and (2) a short sale against the box. Both involve borrowing securities from another account holder, arranged by a broker…(details in the guide.)

Dividends and “payments in lieu” of dividends

When traders borrow shares to sell short, they receive dividends that belong to the lender, the rightful owner of the shares. After the short seller receives these dividends, the broker uses collateral in the seller’s account to remit a “payment in lieu of dividend” to the rightful owner to make the lender square in an economic sense. But there are complications, which may lead to higher taxes.

Dividend issues for the short seller

If a short seller holds the position open for 45 days or less, add the payment in lieu of dividend to cost basis of the short sale transaction reported on Form 8949 (realization method) or Form 4797 (Section 475 MTM method). Watch out for a capital loss limitation. Traders with trader tax status (TTS) using Section 475 are not concerned as they have ordinary loss treatment. If the position is held open for more than 45 days, payments in lieu of dividends are deductible as investment interest expense (reported on Form 4952). Watch out, because the current year tax deduction is limited to net investment income, which includes portfolio income, minus certain investment expenses including stock borrow fees, but not other investment expenses suspended as itemized deductions in TCJA. (See Form 4952 instructions.) Carry over disallowed investment interest expense to the subsequent tax year(s). With itemized deduction limitations, some short sellers come up short on investment interest expense deductions. (If a short seller holds the sale open for more than 45 days in connection with a TTS business, payments in lieu of dividends are deductible as business expenses.)

Dividend issues for the lender

When investors’ sign margin account agreements, few realize they are authorizing their broker to lend their shares to short sellers. Instead of issuing the account owner (lender) a Form 1099-DIV, which may include ordinary and qualified dividends, the broker issues a Form 1099-MISC or similar statement for “Other Income.” The lender forgoes the qualified dividends tax break on common stock held at least 60 days. Lower capital gains rates apply on qualified dividends.

Lenders report this substitute dividend payment as “Other Income” on 2018 Schedule 1 (Form 1040) line 21. Don’t overlook including substitute dividends in investment income entered on Form 4952 used to limit investment interest expense. Some brokers offer to compensate lenders for losing the qualified dividend rate. Institutional or large stock lenders may earn credit interest on lending out their shares. Substitute dividend income is included in net investment income for the ACA net investment tax.

Stock borrow fees and loan premiums

Short selling is not free; a trader needs the broker to arrange a loan of stock. Brokers charge short sellers “stock borrow fees” or “loan premiums.” Tax research indicates these payments are “fees for the temporary use of property.” Watch out: Many brokers refer to stock borrow fees as “interest expense,” which confuses short sellers.

For investors, stock borrow fees are “other itemized deductions” on line 16 of the 2018 Schedule A (Itemized Deductions). For 2017 tax returns, stock borrow fees were reported as “other miscellaneous deductions” on line 28 of Schedule A. Instructions for 2017 Schedule A line 28 are the same as 2018 Schedule A line 16 — they include the same items including stock borrow fees. TCJA did not suspend these deductions, whereas, TCJA suspended investment fees and investment expenses (i.e., trading expenses without TTS).

With TTS, stock borrow fees are considered Section 162 business expenses. Stock borrow fees are not “interest expense” so investors can’t include them in “investment interest expense” deductions. Stock borrow fees are deductible for net investment income for ACA’s net investment tax.

Excerpt from Green’s 2019 Trader Tax Guide Chapter 16 Short Selling. 

| By: Robert A. Green, CPA

5 stars. Ms. Christie Kam and her staff have been of immense help. The whole experience has been very seamless. The professionalism and expedient service has removed a lot of ‘headache’ in settling all my trades. Thanks a lot and please keep up your excellent work.

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

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

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

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

 

 

barrons

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Accounting software and services for traders
When it comes to a trading activity, it’s wise to do separate accounting for trading gains and losses vs. expenses. A consumer off-the-shelf accounting program is fine for keeping track of expenses, non-trading income, home office deductions and itemized deductions. But when it comes to trade accounting for securities, these programs are inadequate — you need a specialized securities trade accounting program and/or accounting firm, or in limited cases brokerage firm reporting may be sufficient. On our Website accounting services page, learn more about trade accounting software. Choose our professional accounting service using this software.

Futures accounting isn’t required, as you can rely on the tightly controlled one-page 1099-B with summary reporting, using MTM reporting. Although spot forex accounting could be a nightmare if you try to do it yourself, you can rely on the broker’s annual tax reports and should use summary reporting. Spot forex is not a “covered security,” so there are no Form 1099-Bs.

Frequently Asked Questions (FAQs) On Trader Tax

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

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

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

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

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

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

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

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

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

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

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

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

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

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