Tax question re: day trading in/out same stock

Discussion in 'Taxes and Accounting' started by jonnyz1245, Nov 27, 2008.

  1. lets say I have made 50+ round trips in a month of the same two stocks. I trade lots of 1000 shares and each trade is about 100K. I have been scalping and am so far in the green about 15K. Looking at daytrading for dummies today in the chapter on taxes it said "in the extreme case if you move in and out of a stock over and over the irs can tax you on your total gain and not net"

    the example they gave was say yopu made 300K in profits and 200K in losses, your net is 100K but they can tax you on the 300K.

    what is your experience with this. I am worried now that I have lost on a couple trades...

    #'s below are taken from my fidelity tax page and is current

    Realized Gain/Realized Loss/Disallowed Loss/
    $34,265.30 -$109,274.46 $90,289.62

    Net Gain/Loss

    after reading that I am all worried now that I am in over my head. I have traded 4 million in stocks and thought that I would only pay tax on my true net gain but this has me all confused.

    will someone with some expertise please help clear this up and clarify for me please. I will stop trading tomorrow if I am getting walloped on gains I have given back.

  2. rwk


    I don't understand the example from the Fidelity tax page.

    In general, short term equity gains and losses are netted, and you pay tax on the net (after commissions, fees, etc). Same for long term (held more than 1 year). Same for Section 1256 (futures and options). In your own example, you would pay tax on $100k gain.

    I heard about a case where a trader either failed to file a return, or filed incorrectly, and the IRS calculated his gain based on the net sale proceeds with the cost set to zero. If that happened in your case, you would be hit with taxes on $4mm.

    If you do your taxes correctly, you shouldn't have that problem. Contrary to what many tax professionals want you to think, you DO NOT have to use a tax professional to file correctly and pay the minimum due. Nor is it true that professionally prepared returns are always correct. I do my own taxes, and I am a trader, not an accountant. It's not that hard.
  3. thank you for your reply. I think you mean to say in my example I would only pay tax on the net of 15K from the fidelity #'s. So far in this month it shows my net gain as a little over 15K and thats it. The other #'s are from their tax page and I don't fully understand them.

    the 100K was from the tax section in the daytrading for dummies book.

    if I understand this correctly the long and short of it is I can trade the same stock 10 times a day year round and only ever pay on the total net gain for any given year, no matter how many gains and losses I have on trades throughout the year.

    In an extreme example, say I trade xyz 1000 times and a total of $100 million. I win on 55% of the trades and get stopped out on the other 45%. at the end of all this I have a net of 25K when all the wash sales etc are taken into account. I then submit my tax forms from fidelity and cut the IRS a check using my federal income tax % rate as a basis and I am good to go?

    thanks again!
  4. rwk


    Now I see what you are saying -- my apologies. If you sell a stock at a loss and re-purchase it within 30 days, that's a wash sale. A wash sale loss must be added to your cost basis. If you have a lot of money at stake, this is one area of tax law where you might want to check with a tax advisor. When the wash sale rule was created, they obviously weren't thinking of day traders.

    In the future, you can avoid wash sale rules by electing mark-to-market (Section 475) accounting. It's too late for 2008 taxes.

    I do my own wash sale accounting, but I can see why some traders might prefer to toss it over the wall to a tax pro.
  5. Ok, thanks.

    From what I have been able to gather snooping around the net I should be Ok as long as I don't buy and sell the stock in question in December or January, effectively leaving 61 days in between the last buy and sell. If my understanding is correct, one can move in and out of a stock as much as they want and only ever pay tax on the net gain as long as they do not hold the stock at year end and beginning of the new year. That way the IRS see's that you are completely out of any position related to the stock subject to the wash sale rule.

    I will contact a tax specialist next week to make sure but I think I am fine.

    Fidelity has a tax gain/loss feature that is already itemizing shares/ share lots into wash sale #'s for me and at the end of all this leaves me with the 4 #'s in my first post, the main of which is the net gain of 15K

  6. OffTilt

    OffTilt Guest

    As long as you don't trade the same stock in the last 30 days of this year or the first 30 of 2009 then you'll be fine
  7. My understanding of the wash sale rule would lead me to believe that stopping trading for the last 30 days of the year would be sufficient. I can't see what the first 30 days of the next year would have to do with it.

  8. godbyka


    I have a problem. May be someone know smth about it. My friend and I are trading together and our accounts are registed in one broker. This month he had big looses and to prevent his accout from closing I tried to help him. We traded stocks with big spread, we were in and out at the same price, so my looses and his gains were equal. We got th message about wash trade. What is this, and may they take money away?
  9. Surdo


    Have you bothered to read this thread or search how to avoid WASH SALES?
  10. OffTilt

    OffTilt Guest

    I'm saying either the last 30 or the first 30....not both.
    #10     Nov 28, 2008