Form 8949 & 1099-B Issues

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

Per IRS rules for brokers, Form 1099-B reports wash sales for that one brokerage account based on “identical positions.” The IRS rules differ for taxpayers, who must calculate wash sales based on “substantially identical positions” across all their accounts, including joint, spouse, and IRAs. In many cases, broker-issued 1099-Bs might report different wash-sale losses than a taxpayer should report on Form 8949. A taxpayer may trigger a wash-sale loss between a taxable and IRA account, but a broker will never account for that on a 1099-B. Sometimes, 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 by year-end.

This problem is still unknown to many taxpayers and tax preparers. Many continue to file a Form 8949, relying solely on broker 1099-B reporting when they should consider using securities trade accounting software to calculate and report wash-sale loss adjustments based on IRS rules for taxpayers.

Calculating wash sales based on IRS rules for taxpayers leads to unreconciled differences between Form 8949 and 1099-B. Some tax preparers don’t want to draw attention to those differences, fearing IRS notices generated from IRS 1099-B automated matching programs. Ironically, 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 confused wash sales.

There is one scenario where a taxpayer can confidently rely on a 1099-B: The taxpayer has only one brokerage account, trades equities, and has no activity in nontaxable retirement 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 solution is to trade Section 1256 contracts. Traders can keep investment accounts with far less wash-sale loss activity on the individual level.

For more information, see Green’s Trader Tax Guide.