Form 8949 & 1099-B Issues

Securities traders face challenges with Form 8949 and 1099-Bs over cost-basis reporting.

Per IRS rules for brokers, 1099-B reports wash sales per that one brokerage account based on identical positions. The IRS rules are different for taxpayers, who must calculate wash sales based on substantially identical positions across all their accounts including joint, spouse, and IRAs. 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 taxpayer may trigger 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 loss in another account, thereby eliminating the problem.

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

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 seems to have caused a mess.

There is one scenario where a taxpayer can confidently 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 to carry into the current year from the prior year.

This problem is biggest for taxpayers who have multiple accounts. One solution is for traders who qualify for TTS to trade in an entity and elect Section 475 MTM, which is exempt from wash-sale rules. Another way to avoid wash-sale loss adjustments is to trade Section 1256 contracts. Traders can keep investment accounts with far less wash-sale loss activity on the individual level.

Excerpt from Green’s 2019 Trader Tax Guide