Securities

Securities traders need to watch out for higher tax rates, wash sales, capital-loss limitations and accounting challenges.

Securities include:

  • equities (stocks)
  • equity (stock) options
  • narrow-based indexes (an index made up of nine or fewer securities) and options on narrow-based indexes
  • exchange-traded funds (ETFs) and options on securities ETFs structured as a regulated investment company (RIC)
  • exchange-traded notes (ETNs) structured as debt instruments
  • bonds
  • mutual funds
  • single-stock futures

Realized transactions in securities are reported on Form 8949, which feeds into Schedule D where short- and long-term capital gains rates apply. (See Chapter 4 for more on Form 8949.)

Short-term capital gains rates are the ordinary tax rates, up to 37% for 2018 and 2019. With the default cash method, only realized gains and losses on securities are reported for the tax year. Wash-sale loss adjustment rules apply throughout the year with individual taxable accounts and IRAs.

Securities traders using the cash method may defer unrealized gains (or losses) on open positions until realizing a gain (or loss) on a sale. Long-term capital gains rates — 0%, 15%, and 20% for 2018 and 2019 — apply to sales of securities held for 12 months or longer.

Business traders in securities (with TTS) should consider a Section 475 MTM election in order to have business ordinary loss treatment — navigating out of wash-sale loss rules and capital-loss limitations on business trades — since they already are paying ordinary rates on short-term capital gains. The 20% deduction on QBI likely includes Section 475 ordinary income in a specified service activity, which could be a valuable deduction for some.

With Section 475 MTM, the trader reports both realized and unrealized gains and losses on Form 4797 Part II, as nothing is deferred. But, where Schedule D capital losses are limited to $3,000 per year against ordinary income, Section 475 MTM losses are unlimited as business losses (see Chapter 2).

Tax rules require reporting realized securities trades on a trade by trade (or line by line) basis on Form 8949, including reporting wash sales on each transaction. (Read about tax accounting for securities transactions including wash sale reporting in Chapter 4.)

Excerpt from Green’s 2019 Trader Tax Guide

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