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
  • commodities 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 selling,” investors realize losses before year-end. Be careful not to re-enter those positions within 31 days; otherwise, the planned tax loss might defer to 2020 as a wash sale loss adjustment.

Short-term capital gains (STCG) use ordinary tax rates, with progressive tax brackets currently up to 37% for 2019 and 2020. Long-term capital gains (LTCG) rates are significantly lower, and they 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.

With the realization method for securities, enter each securities opening and closing trade, and wash sale loss adjustment 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 taxes realized and unrealized capital gains and losses at year-end, by imputing sales of open positions using year-end prices. Traders eligible for trader tax status (TTS) are entitled to elect Section 475 MTM ordinary gain or loss on securities and or commodities. Section 475 trades are exempt from wash sale loss adjustments and the $3,000 capital loss limitation.

For more information, see Green’s Trader Tax Guide Chapter 3 Tax Treatment of Financial Products