wash sale: stop trading for 30 days
- Thread starter howardy2k
- Start date
if your trades were profits you dont have a problem. wash sales only apply to loses. if not the easiest thing to do is go get turbotax home and business primere and enter the trades. it calculates wash sales.
there is no reason not to trade it for 30 days. after you run the trades through turbo tax hopefully you will have a profit and it will not matter.
do you mean to tell me that if i add up all the buy/sell (about a few hundred times during the course of the year) for that one particular stocks then i dont have to worry about wash sales if my NET total for that one particular stock is a profit?
for example: all sales for that particular stock= 1,000,000,000
all buys for that particular stock= 999,900,000
net: 100,000
so no wash sale?
You don't HAVE to stop trading the stock for 30 days. If you sell at a loss then rebuy within 30 days, you can't claim the loss on the sale. However, you get to add the loss to the cost basis of your next trade.
Unless you never make up the original basis loss, the wash sale rule has zero financial consequences other than possibly shifting the tax accounting between years. It's stupid and should be repealed.
It appears this same subject is being addressed on two different threads at the same time, albeit with different participants on the two threads.
I agree with the explanations given by the various posters on this thread. I am posting the question asked and my answer given below from the second thread that has been going on in what amounts to a parallel track:
____________________________________________________
if ur not mtm, do u really have to stop
trading for 30days to bypass the washsale rule. I trade the same stock hundreds, even thousand of times over the course of a year.
Thanks
Hi Howardy2k:
I don't want to have to deliver bad news, but the rule is the rule. There are two ways to get out of the wash sale rule for stocks, and you've identified both of them. One way out is to elect MTM accounting. The other way is to get outside the wash sale window, i.e. 30 days on either side of the trade.
The only good news here is to understand that the wash sale rule does not disallow recognition of the losses forever, rather it simply defers such recognition. The deferral is accomplished by adjusting the basis of the replacement stock, i.e., raising the basis by the amount of the loss that was not recognized.
So when you eventually get around to a sale outside the wash sale window, you will have less taxable gain than you otherwise would have had. At that point the accumulated losses are factored into the adjusted basis, thus reducing your gain recognized. So at that point you get full tax benefit [if that is the word] of the captive losses you were unable to recognize along the way.
I agree with the explanations given by the various posters on this thread. I am posting the question asked and my answer given below from the second thread that has been going on in what amounts to a parallel track:
____________________________________________________
if ur not mtm, do u really have to stop
trading for 30days to bypass the washsale rule. I trade the same stock hundreds, even thousand of times over the course of a year.
Thanks
Hi Howardy2k:
I don't want to have to deliver bad news, but the rule is the rule. There are two ways to get out of the wash sale rule for stocks, and you've identified both of them. One way out is to elect MTM accounting. The other way is to get outside the wash sale window, i.e. 30 days on either side of the trade.
The only good news here is to understand that the wash sale rule does not disallow recognition of the losses forever, rather it simply defers such recognition. The deferral is accomplished by adjusting the basis of the replacement stock, i.e., raising the basis by the amount of the loss that was not recognized.
So when you eventually get around to a sale outside the wash sale window, you will have less taxable gain than you otherwise would have had. At that point the accumulated losses are factored into the adjusted basis, thus reducing your gain recognized. So at that point you get full tax benefit [if that is the word] of the captive losses you were unable to recognize along the way.
Joe,
I haven't elected MTM since I want to switch to futures sometime in the next couple of years and don't want to give up the 60/40 tax treatment.
Is it true that the only way to have MTM reversed is to contact the IRS Commissioner directly and get his/her permission?
Also, why is the wash rule called a nightmare at tax time if a trader has not elected MTM?
I haven't elected MTM since I want to switch to futures sometime in the next couple of years and don't want to give up the 60/40 tax treatment.
Is it true that the only way to have MTM reversed is to contact the IRS Commissioner directly and get his/her permission?
Also, why is the wash rule called a nightmare at tax time if a trader has not elected MTM?
Hi VVVWaveRiderVVV:
Let me take your questions in reverse order:
1. The reason the wash sale rule is considered a ânightmareâ for traders is because the tax preparer may have to spend huge amounts of timeâone estimate I saw was 100 hoursâto match up potentially hundreds or even thousands of trades to determine which trades fall within the rule and hence have nonrecognition of losses. Once those trades are determined, then the tax preparer has to adjust the basis of the replacement stock. Then that replacement stock has to be tracked to see if it is sold for a loss. If so, then the tracking and adjustment drill continues. To sort out all of this takes time. If the CPA is charging $150 or so per hour, the tax preparation bill for the trader could be thousands of dollars, just to determine whether there is a reportable gain or loss, and if so, how much. A tax preparation bill of $15,000 qualifies as a ânightmareâ for just about anybody, but it may be unavoidable if the rule applies and there are thousands of trades that fall within the rule.
2. Yes, once the MTM election is made, it can only be revoked with the permission of the Commissioner of the IRS. Such permission is not likely to be granted since the IRS does not want taxpayers to switch back and forth according to the advantages of the moment. The IRS also likes consistency in accounting methods, so a revocation of the MTM election would change the taxpayerâs accounting and result in inconsistent treatment between tax yearsâsomething that is anathema to the IRS.
3. Now to the meat of your questionâthe interplay between the MTM election under Section 475 and 1256 contracts. Because of the subtleties of the points Iâm about to address, you do NOT want to make the MTM election if you are going to be trading 1256 contracts WITHOUT a specific, one-on-one consultation with your tax advisor. The stakes are too great to screw this up. Having said that, it is indeed possible to make a MTM election for your securities trading business and keep your commodities trading business (i.e., 1256 contracts) out of that election so you can preserve the 60/40 tax treatment for the 1256 contracts.
There are two approaches to keeping the 1256 contracts out of the MTM election. Actually, there is a third approach, but it is problematic and hence I donât want to address it. The first two approaches are clean.
The first approach is based on the way that Section 475 defines âsecurity.â The way it is defined explicitly excludes 1256 contracts from the definition. See IRC Section 475(c)(2)(flush language). Hence a MTM election for your securities trading business does not cover 1256 contracts.
The second approach is based on the clear recognition by the IRS that trading in securities vs. trading in commodities (1256 contracts) constitute two separate businesses. The Code specifically provides that MTM elections for a securities trading business and a commodities trading business are to be separately made. See IRC Section 475(f)(3).
Given those two approaches, a taxpayer could simply take the MTM election without elaboration and rely on the Code language to exclude 1256 contracts from the election. But there are a number of things a trader can do to strengthen his position in this regard to deter any IRS argumentâin much the same way as one can wear a certain religious accoutrement to ward off werewolves.
The first thing a trader could do is to use language in the election letter that beats the code sections down the IRSâs throat. An example is:
"I hereby elect to use the Mark-to-Market method of accounting under Section 475(f)(1) of the Internal Revenue Code for my trade or business of trading securities. The first year for which the election is effective is the taxable year beginning January 1, (insert applicable year).
This election applies only my securities trading business per Section 475(f)(1). It does not apply to any business I have now or in the future for trading commodities and Section 1256 contracts per Section 475(f)(2)."
The second protective step a trader can take is to have the 1256 contracts trading done in a separate account from the account where the securities (stocks, options) trading occurs. The separate accounts simply reinforce the proposition that there are two separate businesses involved, and it was the taxpayerâs intent to elect MTM for one business (securities) and not for the other business (commodities/1256 contracts).
I hope this info helps you!
Let me take your questions in reverse order:
1. The reason the wash sale rule is considered a ânightmareâ for traders is because the tax preparer may have to spend huge amounts of timeâone estimate I saw was 100 hoursâto match up potentially hundreds or even thousands of trades to determine which trades fall within the rule and hence have nonrecognition of losses. Once those trades are determined, then the tax preparer has to adjust the basis of the replacement stock. Then that replacement stock has to be tracked to see if it is sold for a loss. If so, then the tracking and adjustment drill continues. To sort out all of this takes time. If the CPA is charging $150 or so per hour, the tax preparation bill for the trader could be thousands of dollars, just to determine whether there is a reportable gain or loss, and if so, how much. A tax preparation bill of $15,000 qualifies as a ânightmareâ for just about anybody, but it may be unavoidable if the rule applies and there are thousands of trades that fall within the rule.
2. Yes, once the MTM election is made, it can only be revoked with the permission of the Commissioner of the IRS. Such permission is not likely to be granted since the IRS does not want taxpayers to switch back and forth according to the advantages of the moment. The IRS also likes consistency in accounting methods, so a revocation of the MTM election would change the taxpayerâs accounting and result in inconsistent treatment between tax yearsâsomething that is anathema to the IRS.
3. Now to the meat of your questionâthe interplay between the MTM election under Section 475 and 1256 contracts. Because of the subtleties of the points Iâm about to address, you do NOT want to make the MTM election if you are going to be trading 1256 contracts WITHOUT a specific, one-on-one consultation with your tax advisor. The stakes are too great to screw this up. Having said that, it is indeed possible to make a MTM election for your securities trading business and keep your commodities trading business (i.e., 1256 contracts) out of that election so you can preserve the 60/40 tax treatment for the 1256 contracts.
There are two approaches to keeping the 1256 contracts out of the MTM election. Actually, there is a third approach, but it is problematic and hence I donât want to address it. The first two approaches are clean.
The first approach is based on the way that Section 475 defines âsecurity.â The way it is defined explicitly excludes 1256 contracts from the definition. See IRC Section 475(c)(2)(flush language). Hence a MTM election for your securities trading business does not cover 1256 contracts.
The second approach is based on the clear recognition by the IRS that trading in securities vs. trading in commodities (1256 contracts) constitute two separate businesses. The Code specifically provides that MTM elections for a securities trading business and a commodities trading business are to be separately made. See IRC Section 475(f)(3).
Given those two approaches, a taxpayer could simply take the MTM election without elaboration and rely on the Code language to exclude 1256 contracts from the election. But there are a number of things a trader can do to strengthen his position in this regard to deter any IRS argumentâin much the same way as one can wear a certain religious accoutrement to ward off werewolves.
The first thing a trader could do is to use language in the election letter that beats the code sections down the IRSâs throat. An example is:
"I hereby elect to use the Mark-to-Market method of accounting under Section 475(f)(1) of the Internal Revenue Code for my trade or business of trading securities. The first year for which the election is effective is the taxable year beginning January 1, (insert applicable year).
This election applies only my securities trading business per Section 475(f)(1). It does not apply to any business I have now or in the future for trading commodities and Section 1256 contracts per Section 475(f)(2)."
The second protective step a trader can take is to have the 1256 contracts trading done in a separate account from the account where the securities (stocks, options) trading occurs. The separate accounts simply reinforce the proposition that there are two separate businesses involved, and it was the taxpayerâs intent to elect MTM for one business (securities) and not for the other business (commodities/1256 contracts).
I hope this info helps you!
Very much so, thank you.
