Wash Sale Nightmare

A

Arjun1

In 1996, I was an active day trader. At the end of the year, I had
lost several thousand dollars. I'm currently being audited for that
year and, because of the wash sale rule, the IRS wants to push my
losses into 1997. Instead of a loss, they claim I had a capital gain
of almost $250,000, creating a tax liability of more than $80,000. On
top of this, they want to charge me almost $40,000 in interest,
including interest for the 19 months it has taken for them to complete
their review of my return!
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How does a retail stock trader avoid the situation mentioned above without m2m election?

I trade mostly futures. I've started trading some stocks. I'm not convinced m2m is the way to go because there are disadvantages - esp. for futures/forex traders.

Disadvantages of Mark-to-Market

There are three potential disadvantages to electing mark-to-market:

* No capital loss carryover: Capital losses can only be offset by capital gains. If you are carrying forward a substantial capital loss, beware: by selecting MTM, your gains would be considered ordinary income moving forward, hence only $3,000 per year could be used to offset your capital loss.

* Loss of long-term capital gains: Forex/futures traders who deal mainly with 1256 contracts typically avoid MTM in order to retain the advantageous long-term capital gains tax rate on 60% of their earnings.

* Election is permanent: As an individual trader, once you’ve made the MTM election, you’re stuck with it. You can petition the IRS, but don’t expect leniency, especially if there is a tax advantage to you. Below, we’ll see how a Traders Accounting tax professional can help you around this obstacle.
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Quote from Arjun1:

How does a retail stock trader avoid the situation mentioned above without m2m election?
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Make sure you're flat the day before Thanksgiving and trade anything you've not traded for the previous 30 days until New Years.
 
"No capital loss carryover: Capital losses can only be offset by capital gains. If you are carrying forward a substantial capital loss, beware: by selecting MTM, your gains would be considered ordinary income moving forward, hence only $3,000 per year could be used to offset your capital loss."

I don't think so. Under MTM, all of your losses can be taken against gains - not just $3K. Thus, if you lost $100K last year (carried over to this year) and you make $200K this year, your tax liability is on $100K. If you did not make the 475 election, then you can take only $3K of losses from the previous year until the NOL is exhausted.

At least this is my understanding of the 475 election.
 
Quote from jprad:

Make sure you're flat the day before Thanksgiving and trade anything you've not traded for the previous 30 days until New Years.
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I know a person who does just that.

He trades SPY from Jan 2 to day before Thanksgiving.
After Thanksgiving he trades QQQQ to Dec 31.
He then goes back to trading SPY on Jan 2.

It is an easy method for him and it works!!!!:)
 
According to what you said above, MTM is not a good choice. So another better way to avoid wash sale is not to repurchase same stock within 30 days. :)
 
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