It's part of a bigger IRS rule (IRS Pub 550 for all the details) that often impacts corporations that might have a fiscal year that ends sometime other than Dec 31st. So I'm guessing they just tried to generalize it as much as possible to apply to every possible situation of every possible taxpayer. But to be honest my knowledge on the matter doesn't extend much past what I've already shared.
Avoiding Wash Sales
- Thread starter davetrading
- Start date
A wash sale is just an imaginary tax construct. It has nothing to do with the total money in your account after any specific trade.
So in your example, suppose you buy 100 XYZ for $1,000 and then a week later sell for $800. You have a $200 loss and your account is down $200. When you repurchase 100 XYZ for $1,000 a week later, what happens is that you can't take that $200 loss on your taxes because it is a wash sale. However, the $200 loss bumps up your cost basis by $200 on the new position. Your cost basis in XYZ if $1,200 now. XYZ goes up 20% and you sell for $1,200. In your account, you gained $200, but on your taxes you report a gain of $1,200 - $1,200 = $0 due to the wash sale basis bump. So on your taxes you will end up reporting no loss on the first transaction and no gain on the second. And your account will be even, which is just how it is in your real account.
So to avoid these wash sale calculations altogether, you can go flat before December and not trade during that month. That will guarantee that there will be no wash sales from one year to the next, so effectively you can ignore them come tax time.
N-n-not trade for a whole month?
To make sure you don't have withdrawal symptoms, what you can do is trade different symbols than you've traded all year long just during the month of December. Then when January rolls around, you go back to trading your normal symbols. If you do this, you have to be aware of the "constructive sale" tax laws.
If I were to start the tax code over, I would just make everyone mark-to-market at the end of the year. All of these rules are overly complex and aggravating.
"A "wash sale" can technically happen at any time, but it only has tax implications if the 30 day period crosses a tax year since that's the only point at which the disallowance matters. Here's an article that explains it, there are dozens more out there if you do a search. If you disagree then happy to walk you through the mechanics of an example if you like?
Interesting. This entire time I've been thinking I was screwed out of money on wash sales. Thank you for the clarification.
Only screwed from the perspective of giving the IRS a year long interest free loan if you hold the string of transactions through December. But you do get it all back eventually.
At least I get it back. This whole time I thought it was lost money.
Why not just make wash sales effective only in December and January? It seems extremely redundant and confusing to keep them year round when they ultimately come out the same as a deduction."
The statements above are incorrect. When you buy or sell a stock or an option (that is a not considered a 1256 contract) you are subject to wash sale rules. Always. Doesn't matter what month it is. You always have to look back 30 days and plan ahead 30 days. People make a big deal about December and January because it can wreak more havoc if you stumble into a wash sale in January which would affect the prior tax year. That's it. It is still a wash sale. There is nothing magical about December that will credit your account the year's wash sales.
Let's say I have $100,000 in my account. Let's say I make $10,000 on a day trade on Monday, July 1st, selling AMZN call options. The next day, I'm not so lucky and lose $30,000 buying or selling some AMZN puts or calls. I live to fight another day and choose other stocks throughout the year to make or lose money on. Or, I'll do one better. Let's say I'm so heartbroken, I don't do any more trades for the remainder of the year. Just too devastated. I don't just take December off as in your example, but take the next six months off. Take the remainder of July through the following January off. My account will still show $80,000 after my loss. When you do your taxes the following year, you are now taxed on your $10,000 short term capital gains on your profit of the first transaction. The second is a wash sale. No one knows about it except you and your bank account. Uncle Sam gives zero shits.
If I had Trader Tax Status and notified the IRS that I would be participating Section 475 MTM accounting, I would not be subject to wash rules, so I would take $20,000 off of my taxable income.
If I had used a 1256 contract in the above scenario, I would still have a loss of $20,000, but if I wasn't a TTS trader, I would use only $3,000 for taxable losses and sock the other $17,000 away for future capital loss carryovers.
If I was bound and determined, I guess you could make the argument that a trader could keep trading AMZN until he or she got it right. Your cost basis would be added to each new purchase and if you were to trade enough, I guess you could eventually dig you out of the hole, but my point is that simply taking December and January off does not erase wash sales incurred earlier in the year. Period.
"A "wash sale" can technically happen at any time, but it only has tax implications if the 30 day period crosses a tax year since that's the only point at which the disallowance matters."-Sig
Not. True. You should consider Wash Sales having tax implications YEAR ROUND. You should consider your past trades and potential future trades if you are constantly trading the same product. Uncle Sam isn't going to waive a magic wand in December if you played nice and stayed out of the market for a month. You do not "get it all back eventually" by sitting out trading in December. That is horrible advice.
I guess it's my fault that we're still talking about wash sales because I stupidly titled this post "avoiding wash sales."
My original post was asking for advice incorporating. I learned a lot. I think Sig mentioned Greentradertax.com. I spent the next few days researching TTS. Read Bob Green's book as well as a few others. I thought you could only claim Trader Tax Status if the majority of your income came from trading. That is not the case. If you qualify as a TTS, you never have to worry about wash sales again. The IRS eliminated a bunch of tax write-offs for traders a few years ago. I thought I was stuck with the standard deduction. If you are able to claim TTS, you get most of them back. You can also write off ALL of your losses for the current tax year against your income from your second job or taxable income. You're not limited to the $3000 capital loss carry over. Of course, the object is to make money. When you do through your TTS entity, you can even write off 20% of your gains off of your taxable income as well. Not to mention you can write off office space, publications, internet, training etc. when electing to use Section 475 MTM.
So, I found my answer. Claim TTS status. Form an Entity. Adopt Section 475.
You have to do at least 2 trades a day (2 buys and 2 sells of something) 4 out of 5 days a week, give or take. Then you have to find tax consultant that deals with day traders.
good luck!
Interesting. This entire time I've been thinking I was screwed out of money on wash sales. Thank you for the clarification.
Only screwed from the perspective of giving the IRS a year long interest free loan if you hold the string of transactions through December. But you do get it all back eventually.
At least I get it back. This whole time I thought it was lost money.
Why not just make wash sales effective only in December and January? It seems extremely redundant and confusing to keep them year round when they ultimately come out the same as a deduction."
The statements above are incorrect. When you buy or sell a stock or an option (that is a not considered a 1256 contract) you are subject to wash sale rules. Always. Doesn't matter what month it is. You always have to look back 30 days and plan ahead 30 days. People make a big deal about December and January because it can wreak more havoc if you stumble into a wash sale in January which would affect the prior tax year. That's it. It is still a wash sale. There is nothing magical about December that will credit your account the year's wash sales.
Let's say I have $100,000 in my account. Let's say I make $10,000 on a day trade on Monday, July 1st, selling AMZN call options. The next day, I'm not so lucky and lose $30,000 buying or selling some AMZN puts or calls. I live to fight another day and choose other stocks throughout the year to make or lose money on. Or, I'll do one better. Let's say I'm so heartbroken, I don't do any more trades for the remainder of the year. Just too devastated. I don't just take December off as in your example, but take the next six months off. Take the remainder of July through the following January off. My account will still show $80,000 after my loss. When you do your taxes the following year, you are now taxed on your $10,000 short term capital gains on your profit of the first transaction. The second is a wash sale. No one knows about it except you and your bank account. Uncle Sam gives zero shits.
If I had Trader Tax Status and notified the IRS that I would be participating Section 475 MTM accounting, I would not be subject to wash rules, so I would take $20,000 off of my taxable income.
If I had used a 1256 contract in the above scenario, I would still have a loss of $20,000, but if I wasn't a TTS trader, I would use only $3,000 for taxable losses and sock the other $17,000 away for future capital loss carryovers.
If I was bound and determined, I guess you could make the argument that a trader could keep trading AMZN until he or she got it right. Your cost basis would be added to each new purchase and if you were to trade enough, I guess you could eventually dig you out of the hole, but my point is that simply taking December and January off does not erase wash sales incurred earlier in the year. Period.
"A "wash sale" can technically happen at any time, but it only has tax implications if the 30 day period crosses a tax year since that's the only point at which the disallowance matters."-Sig
Not. True. You should consider Wash Sales having tax implications YEAR ROUND. You should consider your past trades and potential future trades if you are constantly trading the same product. Uncle Sam isn't going to waive a magic wand in December if you played nice and stayed out of the market for a month. You do not "get it all back eventually" by sitting out trading in December. That is horrible advice.
I guess it's my fault that we're still talking about wash sales because I stupidly titled this post "avoiding wash sales."
My original post was asking for advice incorporating. I learned a lot. I think Sig mentioned Greentradertax.com. I spent the next few days researching TTS. Read Bob Green's book as well as a few others. I thought you could only claim Trader Tax Status if the majority of your income came from trading. That is not the case. If you qualify as a TTS, you never have to worry about wash sales again. The IRS eliminated a bunch of tax write-offs for traders a few years ago. I thought I was stuck with the standard deduction. If you are able to claim TTS, you get most of them back. You can also write off ALL of your losses for the current tax year against your income from your second job or taxable income. You're not limited to the $3000 capital loss carry over. Of course, the object is to make money. When you do through your TTS entity, you can even write off 20% of your gains off of your taxable income as well. Not to mention you can write off office space, publications, internet, training etc. when electing to use Section 475 MTM.
So, I found my answer. Claim TTS status. Form an Entity. Adopt Section 475.
You have to do at least 2 trades a day (2 buys and 2 sells of something) 4 out of 5 days a week, give or take. Then you have to find tax consultant that deals with day traders.
good luck!
Once again, I didn't discover this, I'm just trying to help you out by conveying it to you. It's not open for debate, if you do a search even here you'll see dozens of people describe it and if you were willing to actually pay Green Trader to talk about it he would describe exactly this. Happy to lay a small $1,000 bet to the non-profit of the other's choice on that. I'm absolutely certain on this one which we can settle next week with a conference call to Green Trader, sound good to you?
https://greentradertax.com/how-to-avoid-taxes-on-wash-sale-losses/
https://www.elitetrader.com/et/threads/december-trading-wash-sales-rule.259696/
https://www.elitetrader.com/et/threads/wash-sales.315868/
https://www.elitetrader.com/et/threads/does-a-wash-sale-only-matter-for-eoy-positions.23092/
In case you can't be bothered to read the links, here's a quote from Green Trader "Taxpayers can “break the chain” on WS losses at year-end in taxable accounts to avoid deferral. If a trader sells Apple equity at a loss on December 20, 2019, consider not repurchasing Apple equity or Apple equity options until January 21, 2020. That avoids the 30-day window for triggering a WS loss. In December 2018, many traders realized tax losses before year-end with a market correction. Some didn’t want to wait 30 days and miss the January 2019 rally, thereby triggering significant WS loss deferral at year-end 2018. Deferral of WS losses can become a problem if it causes a capital loss limitation in the subsequent tax year."
By definition a wash sale only occurs after you rebuy a security that you had owned in the previous 30 days. IRS pub 550 instructs us in that situation to use the profit or loss from the previous transaction (the one you sold within 30 days) to adjust the basis of the current purchase (The one you just made within 30 days) rather than considering it as it's own profit or loss. That is all.
So, if you come to Dec 31st and you haven't traded anything in Dec, then by definition it's impossible for you to have any currently in-progress wash sales for the tax year or create any for the past tax year by trades made in Jan. Any wash sales you had previously will be accounted for by the basis step-up or step-down. Which at that point will lead to an identical profit or loss as summing the profits and losses of each transaction. And that will be what you pay taxes on. Therefore there will be no tax implications from your wash sales if you don't have one in-progress over the tax year. Keep in mind this means you can also close a wash sale on Dec 30th and you'll be fine.....as long as you don't open the same or a similar position in the next 30 days in January. If you did, then that Dec 30th transaction will now be considered a wash sale for the last year's tax purposes and you'll have to wait until the next tax year for the basis step up to impact your taxes (note this only applies to losses).
Bottom line is that if you don't have a wash sale transaction that spans the tax year, your taxes will be exactly the same as if you ignored the wash sale rule. The only time you have to worry about it is if you do have a transaction that spans it, whether that's by actually having the transaction open or by buying or selling substantially identical securities in a 30 day period that encompasses Dec 31st.
P.S. In the future if you don't know anything about a subject, you ask a question about it, and someone who knows something about the subject provides you an answer....it's probably best not to immediately decide they're wrong and start arguing with them. Perhaps approach it with the idea that you are indeed naive on the subject, hence the reason for asking the question in the first place. If what the person answering you says doesn't make sense, that's not only fine but expected. However in that situation it makes far more sense to assume you are simply missing something or it wasn't explained well, rather than to assume that the other person is wrong. Especially if you do a quick search and find that dozens of other people are saying the same thing. It's not only common politeness, but it also encourages the future free exchange of help which can only benefit all of us. Thanks for taking this approach under consideration in your future interaction as you become a contributing member of the community here.
Sig has the wash sale stuff down cold.
But here's some other stuff...
The quoted is incorrect in the order, and incorrect in procedure.
It should be... Form an entity, have entity qualify for TTS, entity applies for Section 475 accounting change.
If any ol' entity was to "hire" a trader with TTS, the entity does not magically become TTS qualified. The entity itself must qualify for TTS. Without TTS, 475 is not happening.
Section 475 allows for "ordinary business loss" which for purposes of this discussion is uncapped. Versus a default annual capital loss deduction of 3000 maximum. This is all correct.
Your glamorization is dependent on the tax forms provided to you, an individual, at year-end FROM THE ENTITY and all other personal tax related sources.
If the 20% you mention is QBI, applicability to a trading entity is debatable at best. But yes, along with the ordinary business loss, 475 does unlock deductions and expensing not available to non-trading-business traders.
I have a gut feeling co-mingling of income and expenses will be a big problem for you.
Don't become cited case law.
But here's some other stuff...
The quoted is incorrect in the order, and incorrect in procedure.
It should be... Form an entity, have entity qualify for TTS, entity applies for Section 475 accounting change.
If any ol' entity was to "hire" a trader with TTS, the entity does not magically become TTS qualified. The entity itself must qualify for TTS. Without TTS, 475 is not happening.
Section 475 allows for "ordinary business loss" which for purposes of this discussion is uncapped. Versus a default annual capital loss deduction of 3000 maximum. This is all correct.
Your glamorization is dependent on the tax forms provided to you, an individual, at year-end FROM THE ENTITY and all other personal tax related sources.
If the 20% you mention is QBI, applicability to a trading entity is debatable at best. But yes, along with the ordinary business loss, 475 does unlock deductions and expensing not available to non-trading-business traders.
I have a gut feeling co-mingling of income and expenses will be a big problem for you.
Don't become cited case law.
I don't think your example is correct. Assuming you are flat AMZN options at the end of the year and you did not trade AMZN options for many months, then your taxes will show a $20,000 loss.
Again the assumption is that when you are not trading these securities, then you have no position (are flat). In that case, Sig is completely 100% right and you are not correct.
Nope, don’t want to mess with my taxes. Find it too complicated as it is.