Securities

Securities traders have ordinary tax rates on short-term capital gains, wash sale loss adjustments, capital-loss limitations, and accounting challenges.

Securities traders have ordinary tax rates on short-term capital gains, wash-sale loss adjustments, capital-loss limitations, and accounting challenges.

Securities include

• U.S. and international equities (stocks)
• U.S. and foreign equity (stock) options
• narrow-based indexes (an index made up of nine or fewer securities)
• options on narrow-based indexes
• securities ETFs structured as registered investment companies (RIC)
• options on securities ETF RICs
• commodity ETFs structured as publicly traded partnerships (PTP)
• volatility ETNs structured as debt instruments
• bonds
• mutual funds
• single-stock futures

The IRS taxes securities transactions when a taxpayer closes an open trade—hence the term “realization method.” Taxpayers can defer capital gains by holding open securities positions at year-end. With “tax-loss harvesting,” investors sell to realize losses before year-end 2023. Do not re-enter those positions within 31 days; otherwise, the planned loss might defer to 2024 as a wash-sale loss adjustment. Wash sales during the year can be okay, provided you close them out before year-end. 

Short-term capital gains (STCG) use ordinary tax rates, with progressive tax brackets currently up to 37% for 2023 and 2024. Long-term capital gains (LTCG) rates are significantly lower and apply to sales of securities held for 12 months or more. The LTCG rates are 0% for the 10% and 12% ordinary brackets, 15% in the middle brackets, and 20% in the top 37% bracket. 

The 1099-B displays each opening and closing securities trade and wash-sale loss adjustment with the tax realization method. Report those details on Form 8949, which feeds into Schedule D, where short- and long-term capital gains rates apply. (See accounting and tax reporting for securities in Chapter 4.)

The mark-to-market (MTM) accounting method is different from the realization method. MTM also reports unrealized capital gains and losses at year-end by imputing sales of open positions using year-end prices. Traders eligible for TTS can elect Section 475 MTM ordinary gain or loss on securities and commodities. Securities trades using Section 475 are exempt from wash-sale loss adjustments and the $3,000 capital loss limitation. Qualified business income (QBI) includes net Section 475 gains, so TTS traders can get a 20% QBI deduction if they are under the income cap. (A timely 475 MTM election is critical; see Chapter 2.)

If you would like more information, you can see Green’sTrader Tax Guide Chapter 3, Tax Treatment of Financial Products.