Botched 1099-B cost-basis reporting: The List

TraderStephen · Apr 13, 2012

I've noticed a problem with E*Trade 1099-Bs. Apparently they used specific lot identification IF you identified the lot prior to the trade. However, if you identified specific lots AFTER the trade (but before settlement), the 1099-B uses FIFO instead of the specific lot. The system itself has the correct tax lot identification when you log in, but the 1099-B doesn't reflect the specific lot identification.

This appears to be a systemic issue rather than an isolated mistake, but I'm still plugging through 50 or so pages on a line-by-line basis.

AAAintheBeltway · Apr 13, 2012

Robert,

Am I correct in assuming the issue is soley to do with the wash sale adjustments? I see on one of my 1009's that the broker increased the basis for every potential wash sale, and reported a cumulative number for all the disallowed losses. What the point of all that was is beyond me. Adjusting for those disallowed losses will not obviously produce a correct net, since there could have been considerable double counting.

Robert A. Green · Apr 13, 2012

Quote from AAAintheBeltway:

Robert,

Am I correct in assuming the issue is soley to do with the wash sale adjustments? I see on one of my 1009's that the broker increased the basis for every potential wash sale, and reported a cumulative number for all the disallowed losses. What the point of all that was is beyond me. Adjusting for those disallowed losses will not obviously produce a correct net, since there could have been considerable double counting.

Wash sale reporting is the biggest problem with 1099-Bs, but there are many other types of problems, too. Everything from adjusting purchases, when they should adjust proceeds to vice versa, omitting transactions, double counting transactions, handling short sales wrong, and more. It's almost a comedy of errors, but no one is laughing.

What you describe above are "potential wash sales" as I wrote about on "Brokers are only reporting potential wash sales, not final wash sales" http://www.greencompany.com/blog/index.php?postid=142

There are plenty of other problems with wash sales, too. Per my blog "IRS, why force taxpayers to reconcile securities-broker 1099-Bs to tax returns, when your rules are apples vs. oranges?" at http://www.greencompany.com/blog/index.php?postid=141

Wash sales are bound to be wrong:
When it comes to wash sales, there are a multitude of things that can and will go wrong, and that messes up cost basis and reconciliations for securities traders (unless they use Section 475 MTM and are exempt from wash sales).

First, many brokers are using back-office tax-accounting solutions that may botch wash-sale reporting, since they have not focused on it much in prior years. Second, there is the cost-basis rules transition problem mentioned earlier, with brokers omitting 2010 wash sale cost basis deferred into 2011. Third, most brokers rushed 1099-Bs to the printer before doing an end of January wash sale calculation (covered earlier). Fourth, most brokers report wash sales between âidentical positionsâ (the same symbol only), whereas, taxpayers are required to report wash sales between âsubstantially identical positionsâ (such as between stocks and options). How can the IRS ask brokers to calculate wash sales according to identical positions only and taxpayers by substantially identical position? Even if brokers could get all the above right, broker-provided wash sales would still be wrong because brokers only report wash sales in one account, whereas a taxpayer must report wash sale analysis across all taxable accounts, including IRAs.

I wrote a draft blog, which I will publish soon calling for a full-scale repeal of the dumb wash sale rules. They make no sense for active traders.

gaj · Apr 13, 2012

penson's now correcting the 1099s again, as of 4/12, for one of my brokers...

AAAintheBeltway · Apr 14, 2012

Quote from Robert A. Green:

Wash sale reporting is the biggest problem with 1099-Bs, but there are many other types of problems, too. Everything from adjusting purchases, when they should adjust proceeds to vice versa, omitting transactions, double counting transactions, handling short sales wrong, and more. It's almost a comedy of errors, but no one is laughing.

What you describe above are "potential wash sales" as I wrote about on "Brokers are only reporting potential wash sales, not final wash sales" http://www.greencompany.com/blog/index.php?postid=142

There are plenty of other problems with wash sales, too. Per my blog "IRS, why force taxpayers to reconcile securities-broker 1099-Bs to tax returns, when your rules are apples vs. oranges?" at http://www.greencompany.com/blog/index.php?postid=141

Wash sales are bound to be wrong:
When it comes to wash sales, there are a multitude of things that can and will go wrong, and that messes up cost basis and reconciliations for securities traders (unless they use Section 475 MTM and are exempt from wash sales).

First, many brokers are using back-office tax-accounting solutions that may botch wash-sale reporting, since they have not focused on it much in prior years. Second, there is the cost-basis rules transition problem mentioned earlier, with brokers omitting 2010 wash sale cost basis deferred into 2011. Third, most brokers rushed 1099-Bs to the printer before doing an end of January wash sale calculation (covered earlier). Fourth, most brokers report wash sales between âidentical positionsâ (the same symbol only), whereas, taxpayers are required to report wash sales between âsubstantially identical positionsâ (such as between stocks and options). How can the IRS ask brokers to calculate wash sales according to identical positions only and taxpayers by substantially identical position? Even if brokers could get all the above right, broker-provided wash sales would still be wrong because brokers only report wash sales in one account, whereas a taxpayer must report wash sale analysis across all taxable accounts, including IRAs.

I wrote a draft blog, which I will publish soon calling for a full-scale repeal of the dumb wash sale rules. They make no sense for active traders.

Thanks Robert. You have done a great job on this issue. I don't know how you find time to post here this time of the year, but thanks.

The thought crossed my mind that these rules and the vastly increased compliance burden reflect more than just confusion and poor implementation. The government has never liked the idea of day traders, etc, and neither do the big mutual funds and pension funds. Maybe this is just a stealth campaign to force us out. I know the idea of just restricting active trading to futures and using my IRA to swing trade stocks is beginning to look attractive.

gkishot · Apr 14, 2012

Quote from Robert A. Green:

Wash sale reporting is the biggest problem with 1099-Bs, but there are many other types of problems, too. Everything from adjusting purchases, when they should adjust proceeds to vice versa, omitting transactions, double counting transactions, handling short sales wrong, and more. It's almost a comedy of errors, but no one is laughing.

What you describe above are "potential wash sales" as I wrote about on "Brokers are only reporting potential wash sales, not final wash sales" http://www.greencompany.com/blog/index.php?postid=142

There are plenty of other problems with wash sales, too. Per my blog "IRS, why force taxpayers to reconcile securities-broker 1099-Bs to tax returns, when your rules are apples vs. oranges?" at http://www.greencompany.com/blog/index.php?postid=141

Wash sales are bound to be wrong:
When it comes to wash sales, there are a multitude of things that can and will go wrong, and that messes up cost basis and reconciliations for securities traders (unless they use Section 475 MTM and are exempt from wash sales).

First, many brokers are using back-office tax-accounting solutions that may botch wash-sale reporting, since they have not focused on it much in prior years. Second, there is the cost-basis rules transition problem mentioned earlier, with brokers omitting 2010 wash sale cost basis deferred into 2011. Third, most brokers rushed 1099-Bs to the printer before doing an end of January wash sale calculation (covered earlier). Fourth, most brokers report wash sales between âidentical positionsâ (the same symbol only), whereas, taxpayers are required to report wash sales between âsubstantially identical positionsâ (such as between stocks and options). How can the IRS ask brokers to calculate wash sales according to identical positions only and taxpayers by substantially identical position? Even if brokers could get all the above right, broker-provided wash sales would still be wrong because brokers only report wash sales in one account, whereas a taxpayer must report wash sale analysis across all taxable accounts, including IRAs.

I wrote a draft blog, which I will publish soon calling for a full-scale repeal of the dumb wash sale rules. They make no sense for active traders.

Totally agree with you. Imagine someone closing 2 positions with realized 100k profit and realized 110k loss. Should he pay taxes on 100k realized gain and defer realizing his losses who knows for how long as if those losses are just on paper?
Insane.

heywally · Apr 14, 2012

Quote from AAAintheBeltway:

Thanks Robert. You have done a great job on this issue. I don't know how you find time to post here this time of the year, but thanks.

The thought crossed my mind that these rules and the vastly increased compliance burden reflect more than just confusion and poor implementation. The government has never liked the idea of day traders, etc, and neither do the big mutual funds and pension funds. Maybe this is just a stealth campaign to force us out. I know the idea of just restricting active trading to futures and using my IRA to swing trade stocks is beginning to look attractive.

You could be me thinking/saying exactly the same things.

Even before this debacle, everyone should have been considering the advantages of restricting their active/swing trading to IRA's because of the tax and (lack of) accounting advantages (knock on wood).

And were the government not so huge and generally incompetent and inefficient (both largely a function of legacy and difficulty in managing that kind of size), I'd completely agree about this being an implicit strategy to weaken "day traders."

bidwell · Apr 14, 2012

Quote from Robert A. Green:

Wash sale reporting is the biggest problem with 1099-Bs, but there are many other types of problems, too. Everything from adjusting purchases, when they should adjust proceeds to vice versa, omitting transactions, double counting transactions, handling short sales wrong, and more. It's almost a comedy of errors, but no one is laughing.

[...]

Wash sales are bound to be wrong:
When it comes to wash sales, there are a multitude of things that can and will go wrong, and that messes up cost basis and reconciliations for securities traders (unless they use Section 475 MTM and are exempt from wash sales).

[...]

I wrote a draft blog, which I will publish soon calling for a full-scale repeal of the dumb wash sale rules. They make no sense for active traders.

-----

Quote from AAAintheBeltway:
Thanks Robert. You have done a great job on this issue.

-----
Ditto...

Given all this trouble with wash sale reporting, I'm thinking of making the Section 475, Mark-to-Market Election with my extension.

What are the main things to worry about, with regard to the IRS, when making the transition to MTM?

Robert A. Green · Apr 15, 2012

Quote from AAAintheBeltway:

Thanks Robert. You have done a great job on this issue. I don't know how you find time to post here this time of the year, but thanks.

The thought crossed my mind that these rules and the vastly increased compliance burden reflect more than just confusion and poor implementation. The government has never liked the idea of day traders, etc, and neither do the big mutual funds and pension funds. Maybe this is just a stealth campaign to force us out. I know the idea of just restricting active trading to futures and using my IRA to swing trade stocks is beginning to look attractive.

Thanks to my partner Darren Neuschwander CPA who heads up tax preparation and our 15 CPAs, I have time to defend the tax and regulatory interests of traders year round, and to do consultations most of the day.

The IRS did not purposely cause this Form 8949 reporting mess and they still don't even realize it's a mess. Someone may get fired over it, too. The IRS and brokers should issue a recall, but they won't.

I agree with you, many securities traders will migrate to futures to avoid this mess. Odd, Chicago exchanges seem to be the beneficiary again. The current administration is from Chicago, but it's a stretch to connect those dots on this one.

Robert A. Green · Apr 15, 2012

Quote from bidwell:

-----

Quote from AAAintheBeltway:
Thanks Robert. You have done a great job on this issue.

-----
Ditto...

Given all this trouble with wash sale reporting, I'm thinking of making the Section 475, Mark-to-Market Election with my extension.

What are the main things to worry about, with regard to the IRS, when making the transition to MTM?

More...

I am going to publish a strong blog to repeal wash sales for active traders soon after the tax deadline of 4/17. I already wrote a draft. I'll have a petition at RallyCongress to sign too. We need everyone to get behind it. It's the only good answer to the botched cost-basis reporting saga.

Section 475 MTM is good for securities, not futures. It's a gamble to elect if you have material capital loss carryovers. If you have a large capital loss carryover, and a material trading loss year-to-date 2012, elect section 475 and then form an entity for a do over. So you can generate capital gains in the entity to pass through and use up your capital loss carryover. There are lots of nuances here and I cover some of them in recent webinars, and all of them in chapter 2 on MTM in Green's 2012 Trader Tax Guide.

This upcoming 4/17 election deadline is very key for many traders. Make the right decision as best you can. Run TradeLog for 2011, then turn on section 475 for 2012, and run TradeLog for 2012. That's the info you need to make the right call for the 4/17 election. Making the wrong decisions on section 475 is the biggest tax mistake traders make.