IB's EFPs & Taxes

I have searched this site and the IRS site without success.

How do you report an EFP transaction on your tax forms? (I sold an EFP and held it to expiration.)

Thanks

 

I would report the EFP on Schedule D, as a constructive sale of an appreciated financial position. I would describe the EFP in terms of its stock leg, without specifically mentioning the EFP or the SSF. I would give both the date of acquisition of the stock, and the date of sale, as the date on which I sold the EFP. I would give the acquisition price as the price I paid for the stock leg. I would give the the sale price as the price for which I sold the SSF leg, less commissions. I would also report both the stock leg and the SSF leg of the EFP as a straddle on IRS Form 6781.

I am not a tax expert. If you do what I would do, and it turns out that I am wrong, then you could be in big trouble.

I think that IB should prepare guidance for its customers, responsive to your type of question.

 

I’ve done more research now and we may be making more out of this than is necessary. This is the logic behind the way I’ll likely complete my 1040. Jim, I’d appreciate your thoughts.

From Pub 550:

Securities Futures Contracts

A securities futures contract is a contract of sale for future delivery of a single security or of a narrow-based security index.
Gain or loss from the contract generally will be treated in a manner similar to gain or loss from transactions in the underlying security. This means gain or loss from the sale, exchange, or termination of the contract will generally have the same character as gain or loss from transactions in the property to which the contract relates.

From Schedule D’s Instructions:

Capital Assets Held for Personal Use

Generally, gain from the sale or exchange of a capital asset held for personal use is a capital gain. Report it on Schedule D, Part I or Part II.

We received no 1099-B from IB for the SSF transactions. However, from Schedule D’s Specific Instructions:

Lines 1 and 8

Enter all sales and exchanges of capital assets, including stocks, bonds, etc., and real estate (if not reported on Form 4684, 4797, 6252, 6781, or 8824). But do not report the sale or exchange of your main home unless required (see page D-2). Include these transactions even if you did not receive a Form 1099-B or 1099-S (or substitute statement) for the transaction.

The bottom line is that you enter the stock on Schedule D’s Line 1 normally, then just enter the SSF on the next line, filling in all the columns. And you’re done. The commissions for the EFP are already contained in the sales price, as reported by IB, for the SSF and that amount is what is entered on Sched. D’s 1(d). No adjustment needs to be made to any of the numbers reported by IB. You report the purchase and sales dates and amounts exactly as they are without mixing anything. This took awhile to figure out but it’s clear and surprisingly simple now. True, this is an EFP that also happens to be a straddle. But using this method I would ignore entering anything about the straddle on Form 6781 as that would result in a double entry on Schedule D (if the instructions are followed) and we are not seeking any tax benefits from straddle strategies and there are no straddle tax issues here. And the tax calculates correctly. The simplicity of this method appeals to me. Mine’s attached.

And one more thing. Jim, thanks for all the assistance you’ve given everyone with these EFPs since the beginning. All the research you’ve done and the questions you’ve answered have been invaluable.

Best regards,
JP

 

Well,

thanks for the thank you. I don't get too many of those.

Let me repeat that I am no tax expert, though I will share my thoughts. Let me take your word for it that the instructions, if followed literally, would result in double counting if the EFP were reported on both Schedule D-1 and Form 6781. I would then think that it should be reported as a straddle on Form 6781, and that it should not be reported on Schedule D-1. I think that your reasons for not doing so are invalid and are contradicted by Pub. 550.

I am personally not doing things in the technically correct way, because I want to save some time; and I believe that given the particular trades I made, always liquidating both sides of the straddle simultaneously or via SSF expiration, so that straddle rules will not alter the amount of the tax liability, the IRS will not care. This is why I am bending the rules by using Sch. D-1 instead of From 6781.

 

SSFs are simply entered and taxed along with securities, as I indicated above, on D. Nothing else needs to be done with EFPs and there are no advantages, to the IRS or to the taxpayer, to do it any other way. Also, all brokers are exempt from reporting SSFs on 1099s for now (but that may change soon). That’s why they are not reported on IB's 1099s. This is all according to IRS specialist Bolton, #903600, who finally returned my call.