It’s real easy. You buy two stocks for 100. One goes to 151. The other goes 50. You sell both. Shortly later you buy the second one for 39 and it ends the year at 41. You have made 3 dollars but owe taxes on 51. there have been years where my taxable gains exceeded my realized gains by a lot. Eventually it all cleaned up when I shut my trading down for 3 months in 2019 and worked with my accountants to move some 1256 pnl backwards
I don’t see anything inaccurate in that article, while IRS can dig as deep as they want if you owe them money. There are plenty of similar cases /examples online. If you make money you pay taxes, and if you didn’t sell a losing stock (because you continued trading it) then the loss doesn’t count until the following year(s). This is very common scenario, so no reason to believe that it wouldn’t be more extreme in some cases.
Only if they’re “substantially identical”, which isn’t clearly defined and subject to interpretation, so gray area. Unless you’d clearly use options to replace holding a stock, for example buying deep ITM calls of selling deep ITM puts, using synthetic longs or synthetic shorts, etc.
He is using Turbo Tax which sucks for wash sales, it disallows them instead of adjusting the cost basis, it can be done but is not easy to figure out how to. He most likely imported his 1099 resulting in disallowing his wash sales. Because he trades a large volume of stocks having all of his wash sales disallowed in Turbo Tax is going to cause a big distortion.
Turbo tax goes by what's on the 1099, per account. If the broker doesn't report it as a wash, then neither will TT.
Importing the 1099 is not the problem, a lot of people are not using form 8949 with the corrected wash sales cost basis. This ends up costing them a bundle. _______________________________________________________________ Source: GreenTraderTax Most active traders make serious errors on income tax returns, whether they self-prepare or engage a local accountant. Many miss out on trader tax benefits and overpay on their taxes. The cost ranges from $5,000 to hundreds of thousands of dollars. 1. Mistakenly believing you can rely on securities Form 1099-B: Most preparers rely on broker Form 1099-B for tax reporting. There’s a problem with wash sales. A wash sale loss is tax-deferred when you buy back a security position 30 days before or after making a sale at a loss. Here’s the problem with wash sales reported on the 1099-B: IRS rules for brokers are simple, and most people do not realize that IRS rules for taxpayers are different and more complex. Tax preparers choose to play ignorant and import 1099-B, so it’s easy to reconcile Form 8949 with 1099-B. That means they are using broker rules and willfully disregarding Section 1091 rules for taxpayers. They should use trade accounting software that is compliant with taxpayer rules. Broker rules base wash sales on identical positions, per account. Taxpayer rules base wash sales on substantially identical positions, across all accounts, including IRAs. A broker does not calculate a wash sale on Apple equity vs. Apple options because they are not identical symbols, but taxpayers must do so because they are substantially identical positions. With education, traders can avoid wash sale losses. That is better than ignoring taxpayer rules and playing the audit lottery with the IRS. 2. Messing up Form 8949 cost-basis reporting: The IRS requires reporting each securities trade on Form 8949 with the description, dates acquired and sold, proceeds, cost basis, code, adjustments, and gain or loss. The primary adjustment is for wash sales. Other cost-basis adjustments include corporate actions (stock splits and reinvested dividends), inherited positions, gifts, and transfers from other accounts. Taxpayers often use incorrect amounts for these items. There is one scenario where a taxpayer can solely rely on a 1099-B and skip filing Form 8949 by entering 1099-B amounts on Schedule D: when the taxpayer has only one brokerage account and trades equities only with no trading in equity options, which are substantially identical positions. Plus, the taxpayer must not have any wash sale loss or other adjustments. However, if you trade options and equities, which are substantially identical positions, and/or you have multiple brokerage accounts, including IRAs, then you need trade accounting software that’s compliant with Section 1091 to generate Form 8949. Most software available through brokerage websites are not compliant with taxpayer rules in Section 1091. Download the original trade history from your broker’s website into a compliant program to generate Form 8949 or Form 4797 with Section 475. https://greentradertax.com/these-tax-errors-will-cost-professional-traders-dearly/
Thanks. My statement is still true. TT only goes by the 1099. TT will not decide for you what is, or isn't substantially identical positions. It only goes by the 1099. This may be fine for folks that only trade a few uncorrelated stocks/ETF's. I don't mean to suggest that TT and only the 1099 are sufficient for options trading tax preparation. Are you aware of any software that decides which of your trades, regardless the instrument, are substantially identical, and properly handles wash sales?
I think that 'substantially identical' is a grey area, it's still on the trader to determine that - not aware of any program that will. Here is a software that does the correct wash sales calculations, easy to use - it works. Their site has a lot of good info on wash sales. https://www.tradelogsoftware.com/resources/wash-sales/
In order for software to correctly do wash sales, it would have to determine which trades are substantially identical, and which are not, correct?
It's all about time frames. The time frame established by the rule is arbitrary, but the whole point is that if you sell and then buy the same stock within 30 days, it's a wash sale, and if you have a loss, that loss cannot be taken as a loss for tax purposes until you finally sell the stock for real, meaning sell it and don't buy it back again for at least 30 days. The wash sale rule often hurts day traders, but that's an unintended consequence. That's not what it was meant to do. It was meant to stop investors from manipulating the system for tax purposes. The concept is not that difficult to understand. Here's a simple example: Suppose I bought XYZ stock in February, 2020 with a cost basis of $5000. The stock has fallen. It is now worth $3600, and it is late November, 2020. As a long-term investor, I don't really want to sell. I want to continue holding the stock. But we are approaching the end of the year, and I have lots of capital gain from selling other stocks. So I get a brain wave. I'll sell my XYZ stock and take a loss of $1400, which will reduce my net capital gain for the year when I do my income taxes. But since I really want to continue holding the stock, I'll just buy it back a couple days later, for about the same price. You can't do that. It won't work. Because you bought the stock back in less than 30 days, your $1400 loss is not treated as a loss when you do your income taxes. You have to take that amount of $1400 and add it to the basis of the second purchase. So the loss is not gone forever, but it is postponed or suspended. It will be properly accounted for when you finally sell the stock "for real." But in the meantime, for tax purposes, it's as if the sale never actually happened. BMK