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