Accounting Solutions

Securities traders face accounting challenges over cost-basis reporting including wash sale loss adjustments.

I recommend keeping your accounting for trading gains and losses separate from expenses. A consumer off-the-shelf accounting program is acceptable for keeping track of expenses, non-trading income, home office deductions, and itemized deductions. But when it comes to trade accounting for securities, you may need a specialized software program or professional service. Futures gain/loss accounting may not be necessary, as traders generally can rely on the one-page 1099-B with summary reporting using MTM reporting. Forex contract traders can depend on the broker’s annual tax reports and should use summary reporting. Spot forex is not a covered security, so Form 1099-B isn’t issued.

U.S.-based cryptocurrency exchanges issue Form 1099-K, 1099-Misc., or 1099-B to taxpayers reaching a certain threshold of transactions, and most provide online tax reports. Consider a cryptocurrency trade accounting solution.

SECURITIES ACCOUNTING IS CHALLENGING

Taxpayers should report proceeds, cost basis, wash-sale loss, other adjustments, holding period, and capital gain/loss for each trade on Form 8949. It’s inappropriate to use summary reporting. Details for Form 8949 are on broker-issued Form 1099-Bs. According to Form 8949 instructions, taxpayers without wash sales and other adjustments to cost basis may enter totals from broker 1099-Bs directly on Schedule D and skip filing Form 8949. After all, the IRS gets a copy of the 1099-B with all the details.

Many taxpayers believe that they don’t have wash sales when they often have many to report to comply with IRS rules for taxpayers, which differ from rules for brokers.

SECTION 1256 TRADERS HAVE IT EASIER

Traders probably do not need a trade accounting solution for Section 1256 contracts since broker 1099-Bs are generally accurate. Section 1256 includes U.S. futures, broad-based indexes (stock index futures), options on both, and non-equity options (see Chapter 3).

Summary MTM reporting means taxpayers can enter the “aggregate profit or loss on contracts” from Form 1099-B on Form 6781. MTM is exempt from wash-sale rules since there are no open positions or adjustments to consider at year-end. Broker tax reporting matches taxpayer reporting.

See Green’s Trader Tax Guide Chapter 4, Accounting for Trading Gains & Losses.