IB 1099-B appears to have many errors

[sprstpd]

Quote from sprstpd:

It makes more sense to me as a mark-to-market trader that I evaluate my foreign stock transactions using the spot price of the trade date. For example, it seems counterintuitive that I would have to use 2012 spot values to value trades I made on the last days of December 2011. But of course, what makes sense doesn't always equate to what is actually the tax law.

This is a followup in case anyone is interested. I have been looking at the IRC and the CFR to figure out what is going on and I think I have found answers:

From 26 C.F.R. § 1.988-1 Certain definitions and special rules:

Example 8. On January 1, 1989, X acquires 100,000 Norwegian krone. On January 15, 1989, X purchases and takes delivery of 1,000 shares of common stock with the 100,000 krone acquired on January 1, 1989. On August 1, 1989, X sells the 1,000 shares of common stock and receives 120,000 krone in payment. On August 30, 1989, X converts the 120,000 krone to U.S. dollars. The acquisition of the 100,000 krone on January 1, 1989, and the acquisition of the 120,000 krone on August 1, 1989, are section 988 transactions for purposes of establishing the basis of such krone. The disposition of the 100,000 krone on January 15, 1989, and the 120,000 krone on August 30, 1989, are section 988 transactions as provided in paragraph (a)(1)(i) of this section. Neither the acquisition on January 15, 1989, nor the disposition on August 1, 1989, of the stock is a section 988 transaction.

From 26 C.F.R. § 1.988-2 Recognition and computation of exchange gain or loss:

(iv) Purchase and sale of stock or securities traded on an established securities market by cash basis taxpayer—
(A) Amount realized. If stock or securities traded on an established securities market are sold by a cash basis taxpayer for nonfunctional currency, the amount realized with respect to the stock or securities (as determined on the trade date) shall be computed by translating the units of nonfunctional currency received into functional currency at the spot rate on the settlement date of the sale. This rule applies notwithstanding that the stock or securities are treated as disposed of on a date other than the settlement date under another section of the Code. See section 453(k).
(B) Basis. If stock or securities traded on an established securities market are purchased by a cash basis taxpayer for nonfunctional currency, the basis of the stock or securities shall be determined by translating the units of nonfunctional currency paid into functional currency at the spot rate on the settlement date of the purchase.
(C) Example. The following example illustrates the provisions of this paragraph (a)(2)(iv).
Example. On November 1, 1989 (the trade date), X, a calendar year cash basis U.S. individual, purchases stock for £100 for settlement on November 5, 1989. On November 1, 1989, the spot value of the £100 is $140. On November 5, 1989, X purchases £100 for $141 which X uses to pay for the stock. X's basis in the stock is $141. On December 30, 1990 (the trade date), X sells the stock for £110 for settlement on January 5, 1991. On December 30, 1990, the spot value of £110 is $165. On January 5, 1991, X transfers the stock and receives £110 which, translated at the spot rate, equal $166. Under section 453(k), the stock is considered disposed of on December 30, 1990. The amount realized with respect to such disposition is the value of the £110 on January 5, 1991 ($166). Accordingly, X's gain realized on December 30, 1990, from the disposition of the stock is $25 ($166 amount realized less $141 basis). X's basis in the £110 received from the sale of the stock is $166.

It is not intuitive to me, but it is clear from these examples that Interactive Brokers is reporting the basis and proceeds correctly for foreign securities. And because I can find no counter-examples for mark-to-market accounting, if I hold a stock across a year boundary I must act like I sell the stock on the last trading day in December. And that implies the foreign security would have settled in January of the next year. So I must use spot values in the next tax year in order to calculate the correct proceeds.

 

[loud]

I think the main problem for MTM (mark-to-market) filers is that the wash sale figures on the 1099 do not distinguish between amounts that have been added to the cost basis for same-year transactions vs. those that have been carried over into 2012.

If wash sale amounts canceled out as they were expired ( > 30 days) then the wash sale totals on the 1099 might be only the amounts being carried over to the next year, in which case the 1099 and MTM totals would be fairly straightforwardly related.

But it doesn't work that way -- the wash sale amounts accumulate, and are offset only by amounts added into the cost basis. Both adjustments are always going up, never down, and the Actual disallowed amount is the difference between these two ever-increasing values.

The problem is that at the end of the year, any outstanding wash sales (which ARE included in the wash sale totals) have not Yet been added to a cost basis (they will be in the cost basis for 2012, and hence ARE NOT in the 2011 totals).

Thus there is NO WAY for a MTM filer to reconcile with the 1099, because the 1099 does not show how much of the wash sale amount has been carried to 2012 (and hence is Not offset by basis adjustments in 2011). Next year this will be affected by carry-over from the prior year as well, so it will be opaque at both ends.

Am I wrong? (I hope so, because I file MTM...)

 

[sprstpd]

Quote from loud:

Am I wrong? (I hope so, because I file MTM...)

In my notes to the IRS this year, I mention that there is no way I can reconcile my totals with 1099-Bs. I can sort of estimate a range of possible "correct" values from the 1099-Bs but nothing more than that. For MTM filers, the 1099-Bs are simply incompatible. And one of the main reasons to choose MTM accounting is to eliminate the need to deal with the wash sale rules. So it seems like you would be justified in ignoring the 1099-Bs altogether.