Tag Archives: cost-basis

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. 

Wash Sale Losses

February 11, 2015 | By: Robert A. Green, CPA

Congress doesn’t want taxpayers to realize “tax losses” that are not “economic losses.” If you close a securities transaction and re-open it right away, you haven’t closed your financial position in that security. At year-end, many taxpayers do “tax loss selling” of securities in December, and the IRS wash sale rules defer the loss if the taxpayer re-purchases a substantially identical position within 30 days before or after, which means into January of the subsequent year. 30 days is an eternity for day and swing traders.

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 for Section 1091 require taxpayers to calculate wash sales based on “substantially identical” positions. That’s different from the rule for brokers that require “identical” positions. This can be a 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.

Many traders and local tax preparers who are not that savvy to the wash sale rules may leap to import 1099-Bs into TurboTax, but they will probably not comply with Section 1091. In effect, they are using broker rules and unknowingly or willfully disregarding Section 1091. (Read Form 8949 & 1099-B Issues.)

Strategies To Avoid Wash Sale Losses

Consider a “Do Not Trade List” to avoid permanent wash sale losses between taxable and IRA accounts. For example, trade tech stocks in your individual taxable accounts and energy stocks in your IRA accounts. Otherwise, you can never report a wash sale loss with an IRA, as there is no way to record the loss in the IRA.

Break the chain on wash sale losses at year-end in taxable accounts to avoid wash sale loss deferral to 2019. If you sell Apple equity on Dec. 20, 2018, at a loss, don’t repurchase Apple equity or Apple equity options until Jan. 21, 2019, avoiding the 30-day window for triggering a wash sale loss. Wash sale loss adjustments during the year in taxable accounts can be realized if you sell/buy those open positions before year-end and don’t buy/sell them back in 30 days.

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.

For more in-depth information on wash sale tax treatment, see Green’s 2018 Trader Tax Guide.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Accounting For Traders

September 6, 2014 | By: Robert A. Green, CPA

Presented by CPAs Robert A. Green and Darren Neuschwander

The best current accounting solutions for traders including Tradelog and a review of our survey results.

*The results of their recent survey on trade accounting software and solutions.
* Accounting software and other solutions for generating Form 8949 and/or Form 4797 with line-by-line reporting of each trade.
*The pros and cons of the leading solutions available and which one may be best for you.
*Deductr, an expense accounting and tax-compliance solution. (starts at 37 minute mark)
*How to pair a specialized trade accounting solution with a customized expense accounting solution.

Accounting Services

September 4, 2014 | By: Robert A. Green, CPA

We offer an accounting service for traders in securities and Section 1256 contracts using specialized software that’s very robust and can handle the most hyperactive traders. Our accounting service respects our tax content across the board. We’ve been rendering this accounting service since 2000.

We also offer an accounting service for cryptocurrency traders. Accounting in this area can be a minefield without using the proper software. All types of coin transactions need to be included. Otherwise, the results cannot be accurate. Additionally, some crypto tax treatment questions remain unanswered by the IRS. We can assure you that we will stay on top of the developments.

Accounting Service For Securities Traders

Accounting for trading gains and losses is the responsibility of securities traders; they must report each securities trade and related wash-sale loss adjustments on IRS Form 8949 in compliance with Section 1091, which then feeds into Schedule D (capital gains and losses).

Broker-issued securities Form 1099-Bs 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 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 accounts including IRAs — even Roth IRAs. The best accounting solution for generating a correct and compliant Form 8949 is 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, 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.

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 imply you can just import your 1099-B. You’ll spend a lot of time finding in their small fine print about having to make Section 1091 adjustments on your own. Some brokers offer a professional trade accounting software, but it makes wash-sale loss adjustments on identical positions, which is non-compliant.

We offer a full professional accounting service
We download your securities trades into software and generate Form 8949 and or Form 4797 in a manner that is compliant with Section 1091 rules. We also prepare Form 6781 for Section 1256 contracts and prepare the necessary tax forms for reporting forex transactions. You can give these tax forms to your tax preparer or our CPAs for our tax compliance service.

Learn more and purchase

Accounting Service For Cryptocurrency Traders

If you invested in cryptocurrencies and sold or spent some during the year, it likely triggered a capital gain, loss, or other income, which you should report on your tax return. There is taxable income or loss on all coin transactions, including coin-to-currency trades, coin-to-coin trades, receipt of coin in some hard fork or split transaction, purchases of goods or services using a coin, and mining income. There are various types of fees related to coin transactions, and the tax treatment varies.

Cryptocurrency tax reporting is complicated and voluminous. We use a coin accounting solution to download coin transactions from your coin exchanges. You need to review the download file to be sure all your transactions were imported correctly. It’s normal to have some transactions entered manually.

By the default, we use the first-in-first-out (FIFO) accounting method for cost-basis on coin capital gain and loss transactions. The IRS requires the “specific identification” (SI) accounting method on intangible property, but most coin traders are unable to use SI since coin exchanges must confirm each SI transaction, and they do not.

As intangible property, cryptocurrencies are not subject to Section 1091 wash-sale loss rules for securities. A Section 475 election also cannot apply to coin since it’s not a security or commodity (Section 1256 contract). (See our coin tax and accounting content.)

Learn more and purchase

 

Accounting Service General Ledger

Entities require a balance sheet and profit and loss statement. That means debits and credits and reconciling accounting to bank statements.

Learn more and purchase

If you have any questions about our accounting services please contact us.

We look forward to working with you soon.

Managing Members Robert A. Green, CPA and Darren L. Neuschwander, CPA

 

Accounting Solutions

August 29, 2014 | By: Robert A. Green, CPA

Trade accounting for securities

When it comes to trading activity, it’s wise to do separate accounting for trading gains and losses vs. expenses. A consumer off-the-shelf accounting program is excellent for keeping track of costs, non-trading income, home office deductions and itemized deductions. But when it comes to trade accounting for securities, these programs are inadequate — you may need a specialized securities trade accounting program and accounting firm, or in some cases, brokerage firm reporting may be sufficient. Futures accounting isn’t required, as you can rely on the tightly controlled one-page 1099-B with summary reporting, using MTM reporting. Although spot forex accounting could be a nightmare if you try to do it yourself, you can rely on the broker’s annual tax reports and should use summary reporting. Spot forex is not a “covered security,” so there are no Form 1099-Bs.

For trade accounting on securities see Form 8949 & 1099-B Issues and Wash Sale Losses.

Trade accounting for cryptocurrencies

Coin tax reporting is complex and voluminous. Consider two coin accounting solutions: Bitcoin.Tax and CoinTracking.Info. I suggest using the FIFO accounting method for cost-basis on coin capital gain and loss transactions. The IRS has not yet stated if it will permit other accounting methods for coin, like the specific identification allowed for securities. Even if the IRS approves specific identification for coin, compliance with the requirement for contemporaneously written instructions to the coin exchange doesn’t seem possible. I doubt a coin exchange would confirm and execute a specific identification. Because the IRS labels coin intangible property, wash-sale loss rules likely don’t apply. TTS traders using Section 475 ordinary gain or loss on securities and/or commodities (Section 1256 contracts) may not use Section 475 on a coin since it’s not a security or a commodity in the eyes of the IRS.

Keep track of expenses year round

If you qualify for TTS, you benefit from business expense deductions. Investors have some investment expenses, excluding home office and education, and investment expenses have less tax benefit with various limitations on Schedule A miscellaneous itemized deductions (for 2017). The new tax law suspends miscellaneous itemized deductions, including investment expenses, starting in 2018. But, you can still deduct investment expenses against net investment income on Form 8960.

Many traders are not sure if they will qualify for TTS until year-end, so it’s important to keep track of all your trading and other expenses in your accounting solution throughout the year. So keep track of expenses all year! Use a consumer accounting program, solution or app of your choice. At a minimum keep track of all expenses using a worksheet.

For more in-depth information on accounting solutions for traders, read Green’s 2018 Trader Tax Guide.

If you need help with accounting, consider our accounting service.

 

Securities

August 28, 2014 | By: Robert A. Green, CPA

Securities include:
  • equities (stocks)
  • equity (stock) options
  • narrow-based indexes (an index made up of nine or fewer securities) and options on narrow-based indexes
  • exchange-traded funds (ETFs) and options on ETFs taxed as Registered Investment Corps
  • bonds
  • mutual funds
  • single-stock futures

Short-term capital gains rates are the ordinary tax rates, currently up to 39.6% for 2017, and 37% for 2018. With the default realization (cash) method, only realized gains and losses on securities are reported for the tax year. Section 1091 wash-sale loss deferral rules apply throughout the year with IRAs and individual taxable accounts (see Wash Sale Losses). Securities traders using the cash method may defer unrealized gains (or losses) on open positions until realizing a gain (or loss) on a sale. Long-term capital gains rates — up to 20% for 2017 and 2018 — apply to sales of securities held for 12 months or longer.

We recommend that business traders in securities (with TTS) consider a Section 475 MTM election to have business ordinary loss treatment — navigating out of wash-sale loss rules and capital-loss limitations on business trades — since they already are paying ordinary rates on short-term capital gains. For 2018, Section 475 ordinary income is qualified business income for the new 20% deduction on QBI in pass-throughs. (See Section 475 MTM.)

Tax rules require reporting realized securities trades on a trade by trade (or line by line) basis on Form 8949, including reporting wash sales on each transaction. (See Accounting Solutions.)

For more in-depth information on securities tax treatment, read Green’s 2018 Trader Tax Guide.