Hi all! i'm working on pairs system between multiple ETF's. in one particular scenario long ETF will be always a winner(short term PnL positive),while other side(short)-will always loose the money. my question is : shorting same security over and over again (almost every day) with a result of a loss on this position-how this loss will be treated by IRS? is it still a wash sale? i can trade both securities long and short,and double the amount of trades,but i don't mind(at this time,for real life testing purposes and to avoid tax complications) to have one "permanent" long and one "permanent" short. i'm not sure about trader status election and MTM accounting,because i can't really understand what IRS mean by "trader must maintain substantial trading activity". is it one trade a day? minute? week? any particular amount of $? there is nothing obout that on IRS website. i'm seeking to profit from daily movements,but does this mean that i MUST trade EVERY day? i might sit down and wait for a few days for one particular "daily movement". it might take some time to develop. Thank you! ---------- You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation; Your activity must be substantial; and You must carry on the activity with continuity and regularity. https://www.irs.gov/taxtopics/tc429.html
It is not clearly defined: http://fairmark.com/traders/defined.htm If you do not qualify for trader tax status, you can take a month off in December or January to reset your wash sales. Or if you are making a profit on your trades in general, you can hope that most of your wash sales take care of themselves by subsequent profits.
let me show a couple examples (assuming one security is always long and another-always short) i've done it on real account with a fairly long string of trades with no losses. it goes something like this: 1. long +550, short-500. total realized PnL =$50 2. long +1100, short -1050 PnL =50 and so on. same security for long, same for short. i'm afraid that by the end of the year positive numbers will be counted as a profit -25% or whatever tax bracket i'm in , and losses( the onces that i got on short side) will be disallowed,because they all will be a wash sales. and i can end up being upside down on my taxes. (own more,than I've made on these trades) my question is-if all of trades (or a wast majority) looks exactly like this one above-those loses-are they will be qualified as a losses or they all (with exception of very first trade) will be wash sales and will not going to be qualified as a short term loss? Thank you!
Yes, that's the idea of wash sales rule: pay taxes on profits now but delay deductions on losses until later. You will have to wait for 30 days before starting trading next year to avoid wash sales rule.
So the short side will always be a loss and the long side a profit? Why not just go long then? What I'm saying is that in general you won't know which side (long or short) will be the winner so hopefully they sort of average out. And if you have a positive expectancy strategy, then maybe you really won't have to worry about wash sales much because your gains will absorb them as time passes. You might also look into the "constructive sale" law and how that might affect this strategy. Are the two stocks you are trading "substantially identical"?
actually-they are identical. problem is-they not stocks,but ETF's. haven't you noticed,that there is a s**t load of ETF's that are holding exact same crap? there is actually more ETF's than stocks,that they are holding. it's all "fees" game these days.thing is in case of long one and short another ETF ( actually -in any case) IRS can twist this term ("substantially identical") any way they like it. i'm trying to capture a spead between two, the spread itself is consistently limited. it won't go 10-20-50%. 2-3-maybe. in many cases-1-2%. but you can't take just one side. see examples above.
i guess i'm going to run a paper account till end of the year,see how many trades, pairs i can get. how frequent this thing is going to be and if it's all good-then i just going to file as a trader next year. the thing is-i've made enough to do nothing,but i like to be "in the game" and i'm a very conservative when it comes to risks. extremely conservative i should say. or maybe i just spoiled by my trading experience from the past. i have no interest to spend another decade or so starring at bunch of flat screens all day. couple trades a week with $500-1000-that's all i need. maintaining trader status looks like a pain in a butt to me. wtf they mean by substantial activity? is 1-2 six figures trades in a week is enough ? or 20 trades , 10-20K $ each is? what's the number? have no f** idea that's why i'm trying to find way around wash sales for pairs and this trader status
To qualify for "trader status" in IRS terms you need 720 trades per year (prorated if you haven't been trading full year) and trades should be 31 days or less.... https://greentradertax.com/trader-tax-center/different-types-of-traders/
Maybe you can trade a pair of ETFs all year except December. And then find substitutes for those ETFs in December that would not be considered substantially identical. Then start trading the original ETFs in January. Then you will avoid the wash sale problem.
I'd very strongly recommend the paper trading account. I thought I'd hit a gold mine with that same concept I can see you're following but in practice it didn't actually pan out. If you're trying it with inverse or leveraged ETFs, keep in mind you'll need to rebalance daily because they return the daily percentage change of their index, not the total return over time. Quantopian is one free site where you can do a bunch of backrests pretty quickly on this exact concept if you can teach yourself Python. I'm even happy to share an Algo that's set up for that if you want to IM me.