Starting this week, your mail box will begin reminding you that tax season is underway with the arrival of your first 1099s. The third phase of the IRS’ cost-basis reporting regulations kicked in during 2014 so your forms will contain added information if you traded options or fixed-rate Treasury, corporate, or municipal bonds. There are some online sources that can help.
Those of us who actively trade options will be most affected by the changes. Cost-basis reporting was required for all opening stock transactions that took place after Jan. 1, 2011, and for mutual funds and exchange-traded funds purchased after Jan. 1, 2012. The rules for tracking options transactions were trickier to concoct and implement, though, and the final implementation was delayed until Jan. 1, 2014. There will be another phase of cost basis reporting that kicks in beginning Jan. 1, 2016 for more complex fixed-income instruments, including variable rate bonds, convertible bonds, and foreign-issued bonds.
All of these regulations came out of the Emergency Economic Stabilization Act of 2008, which required brokers to report the adjusted cost basis for various securities as well as whether gains were short-term or long-term. Taxpayers report their gains and losses on Schedule D of the 1040, based on the 1099-B forms supplied by their brokers.
Those forms, however, can paint an inaccurate picture of your gains and losses.
One factor that makes cost basis reporting tricky is that you may have generated wash sales, which occur when a trader sells a stock at a loss and then buys it back within 30 days. Even if you make those transactions at two different brokers, you can’t write off the loss to claim a tax benefit unless 30 days separate the transactions. Otherwise, it’s considered a wash sale and doesn’t qualify. Let’s say you sell a stock at a loss in your Schwab account, then buy it again two weeks later in your E*Trade account. The computers keeping track of your Schwab trading activity have no way of knowing what happened in your E*Trade account, and cannot flag the resulting wash sale.
The same problem can arise from options transactions.
For instance, if you sell stock at a loss, then buy a call option within the 61-day window (30 days before or after the sale), you’ll have a wash sale–and the loss from the stock will be disallowed. This is true even if the strike price is out of the money, whether or not you exercise the option and acquire the stock. A wash sale can be triggered by selling a put, but only if the strike price is deep “in the money.” If you take a loss on an options trade and then make a similar transaction at a different expiry date, you’ve also created a wash sale.
These aren’t obscure issues. About 60% of Barron’s readers participating in our 2015 Online Broker Review say they trade options.
But big tax software publishers dump the data entry for these transactions under the vague category of “Other.” A spokeswoman for Intuit, publisher of Turbo Tax, says “less than 2% of our customers file returns reporting options trades.”
BEGINNING ON JAN. 1 of 2014, brokers have asked bond buyers which one of five different amortization methods they want to use. These five methods affect how income from the bonds is treated for tax purposes. Once a bond matures or is sold, there is a cost-basis reckoning that occurs, usually many years after the purchase. It pays to educate yourself about them.
For frequent traders, I’ve long been a fan of TradeLog (tradelogsoftware.com) and of CPA Robert Green’s Website, GreenTraderTax (greentradertax.com). On TradeLog you import all of your transactions from different brokers into one spot, and the software flags potential wash sales for your review, regardless of how many brokers were involved.
Speaking of tax prep software, TurboTax angered some customers by forcing those who want to file a Schedule D to use its Premier edition rather than the Deluxe version that had sufficed for years. Premier costs between $20 and $30 more than Deluxe. H&R Block’s tax preparation software responded by offering a free copy of its federal and state package to those who had bought TurboTax Deluxe. Let tax season begin.
See the complete article at Barrons.com
. . . bold italics ours . . .
2008 Investment Guide
(www.tradelogsoftware.com/tradelog) This service caters to folks who do thousands of trades in a year--or don't want to keep their personal holdings online. You download the software, keep track of your trades on your own computer, and then download basis updates. Tradelog has the most sophisticated system for tracking and reporting wash sales and a free help line. Pricing ranges from $69 a year for 200 lots to $297 for an unlimited number.
See the complete article at Forbes.com.
Or keep reading to see what more experts have to say...
FREQUENT TRADERS WHO DO THEIR OWN taxes are either control freaks (my category) or very comfortable with the ins and outs of tax accounting. Crazy is another possibility. In any case, do-it-yourselfers of all types need tax software -- either packaged or online.
Any tax program should be able to deal with income and deductions, but the serious investor needs to compile an accurate Schedule D, covering all transactions. There's no shortage of software alternatives. Sorting through them -- particularly the jumble you see in stores -- is the problem.
One solution for traders with reams of taxable transactions is TradeLog published by Armen Computing. We like TradeLog for active stock and options traders. It does a much better job of tracking options transactions than Quicken or Money, and it's a good tool for short-sellers. TradeLog can also help you track futures transactions, which aren't specifically addressed in other programs.
TradeLog offers five versions, keyed to transaction volume. TradeLog 200, which covers up to 200 trades, is $69. The top-of-the-line GTT TradeLog, which handles unlimited transactions and is aimed at those needing mark-to-market accounting, is $349. GTT TradeLog is also supported by Green Trader Tax (www.greentradertax.com), which provides tax advice for frequent traders.
See the complete article at The Wall Street Journal.
TAX-PREPARATION SEASON OUGHT TO BEGIN with a basic question: Should you do it yourself or hire the job out? If you feel that you're educated enough on the ins and outs of filing your own return, with all the complications your life presents tax-wise, then pick up a copy of a tax-preparation program to help you out.
Filing a full 1040 long form by hand by yourself could qualify as proof of insanity, especially if you've done any substantial trading last year. Entering data on transactions -- including dates, cost bases, sales prices -- plus dividends and interest and then making the appropriate calculations by hand isn't complicated, but it is extraordinarily and unnecessarily tedious. Plus, it all but invites errors on your returns.
If you have a relatively straightforward tax situation -- salary, the typical deductions for mortgage interest and state and local taxes, plus simple investment returns -- tax-software Websites should be able to handle your return without much complication. The program will ask you relevant questions; you fill in the answers as you go along. The interview process should cover most of the usual tax questions, and make suggestions along the way.
FOR THE PERIPATETIC TRADER, neither TurboTax nor TaxCut will make the job of preparing your Schedule D easy, though. That's where TradeLog and GTT TradeLog come in handy (www.tradelogsoftware.com). These programs, published by Armen Computing, help those who actively trade to generate portfolio-performance reports as well as prepare a Schedule D.
GTT TradeLog is aimed at traders who need to track mark-to-market transactions. TradeLog is for all the other active traders. Prices range from $49 for a version that is restricted to 100 transactions, to $349 for the mark-to-market version.
The programs produce a file in TXF format that can be imported into TurboTax or TaxCut for preparing your entire return. We found that TurboTax handled the larger number of transactions more elegantly and with fewer errors.
If you trade in such volumes that you're overwhelming Quicken with your transactions, take a look at TradeLog. It properly matches your trades, including short sales, and it calculates your gains and losses, including wash-sale adjustments. It then generates your Schedule D Capital Gains and Losses report. There's a version for mark-to-market traders, GTT TradeLog, as well as various versions with restricted numbers of transactions. GTT TradeLog can generate Form 4797, a task not easily accomplished by the mainstream tax-preparation programs.
In addition, if you are buying a stock that you sold recently for a loss, you should make certain that you're not falling into the wash-sale trap. A wash sale will happen when an investor sells shares of a security at a loss, and then buys that same security, or one that is considered substantially identical, within 30 days. To further complicate this rule, the security could be purchased 30 days before or after the sale for a loss, effectively creating a 61-day window.
When a wash sale is triggered, your loss is deferred and the cost basis of the new lot is increased to reflect the deferred amount. This will delay -- or possibly deny -- your ability to take a loss on your tax return. To avoid triggering a wash sale on a security sold for a loss, you can buy a stock from the same sector, say one drug company for another, or perhaps an exchange-traded fund that covers the pharmaceutical industry. In the case of mutual funds, you can buy a different fund with a similar investment objective. Online stock and mutual-fund selection tools are a huge help comparing and analyzing alternative investments.
Trade-Ideas flags gaining stocks, while GTT TradeLog keeps track of your gains
Speaking of tools for peripatetic traders, tax season is coming up. We'll look at tax software and online tax-prep sites in a future column, but in the meantime, what can you do if you want to keep track of your stock, futures, options, and currency trades? Try the updated version of GTT TradeLog, a program that helps active traders calculate profits and losses, and prepare tax returns. And mark-to-market traders can relax -- GTT TradeLog can generate Form 4797 for you, which is a task not easily accomplished by the mainstream tax-preparation programs.
TradeLog can close out the tax year and help you match your trades to your broker's 1099. The program establishes a data file for each trading year and each broker, and you can sort transactions on a variety of criteria: ticker symbol, date range, or tax lot. You can even sort trades on whether they're long or short, open or closed. Traders who don't qualify for mark-to-market status can use GTT TradeLog to track wash sales.
New in Version 4, which was recently released, is the ability to resize the TradeLog window and sort the columns. The publisher added a series of online tutorials which describe how the various functions work -- a very helpful improvement over the prior version, which presented you with a blank screen and very little advice on how to make it work.
The program itself has the look of a spreadsheet, so some of the functions are intuitively obvious -- adding a row for new data, for instance. One very welcome addition to this version is the use of alternating colors for the sets of transactions pertaining to a particular stock or option; you can track the progress of your buys and sells up until the time you close out a position. The program shows a summary of your open positions, with your unrealized gains and losses; you can update the prices with a button click.
Additional enhancements include the ability to isolate long- and short-term trades, plus tracking gains and losses from currency trades. You can generate your Schedule D for stocks, options and single-stock futures trades, or the IRS Form 6781 for futures trades.
Although adding transactions manually is easy in TradeLog, frequent traders will find it much more convenient to import transactions from over 30 online brokers, including Interactive Brokers, Ameritrade, BrownCo, E*Trade, Harrisdirect, Schwab, Scottrade, Terra Nova and Tradestation. GTT TradeLog doesn't import the data directly from the broker's Website, but it creates an import filter, found on the Options menu. From your broker's site, you generate a transaction file and save it to your computer, then use the import filter for your broker. The transactions are then read into TradeLog, and you can manipulate them as you please.
You can export transactions to a text file, an Excel file, or an Adobe Acrobat report. The publisher has changed the pricing structure significantly: You can purchase an unrestricted license for $349; or, cheaper versions are available for processing fewer transactions. You can test out a fully functional copy for free, but it's restricted to only 20 transactions.
Or Maybe Not
If you don't know about the wash/sale rule, you'd better find out in a hurry. This obscure tax code drives traders crazy and gives tax advisers a lot of new customers. The bottom line on the rule: Don't carry a stock into the new year after you've traded it during the old year.
Investorwords.com defines the wash/sale rule as follows: "IRS rule prohibiting a taxpayer from claiming a loss on the sale of an investment if that same investment was purchased within 30 days before or after the sale date." The rule is meant to discourage investors from selling at a loss just to get the tax benefit.
Now you're really confused, aren't you?
This is a case where the definition is more confusing than the concept. It's also a case where I can't help you, because I'm not a tax adviser. Whatever you do, make sure to seek counsel from someone who understands the unique issues facing short-term traders. Many financial advisers misinterpret how the rule applies to short-term trading, and their mistakes will cost you a lot of money.
Let the Software Fix It
Speaking of taxes, how can you organize all those short-term trades into a clean IRS format, without staying up nights writing Excel macros? My favorite solution is TradeLog, a pricey yet powerful software that will automatically dump your broker statements into multiple reporting formats, including IRS Schedule D. TradeLog adjusts easily to mark-to-market traders, as well as part-time hobbyists. Oh, did I mention this outstanding product also calculates wash sales?
See the complete article here