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SPDR S&P 500 ETF Message Board

  • golfrattt2000 golfrattt2000 Dec 29, 2012 11:23 AM Flag

    Q for serious traders, Managing your trades around the Wash/Sale rule

    I'll explain my situation, it must be similarly to many here.

    In past years, i've never made money, probably averaged 5-10k loss a year, so not being able to claim some of those losses was never a big deal because i'm still going to get my 3k deduction and my trades were spread throughout numerous equities..

    I expect to make money this year, but have moved to trading strategies surrounding volatility, so i'm always trading the Vix and Vxx..

    So, what do experienced traders here do in regards to losses taken when you're going to trade the same instrument 5 minutes later, or 5 days, etc..?

    OR do you just not pay attention to it..?

    This may be an issue for someone who's well capitalized, but when you're trying to grow your account, it certainly is something to be concerned about and trade with that in mind..

    I'll follow up at the end of the day,..

    Thanks everybody..!

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    • You can register with the IRS as an active trader where all your gains and losses are treated basically as regular income, no cap gains issues involved. There are some tradeoffs however. For one thing you can't unregister from this election so easily. There is a time lag involved also.

      Check it out in the Schedule D pub rules. It's near the end of that doc, if memory serves.

    • Who cares you can use the wash losses in the next year. You don't lose anything. It's to prevent skirting taxes. Very simple.

      Sentiment: Strong Buy

    • Too late for this tax year but if you make an election to mark to market via Section 475 by Apr 15, you will never have to worry about wash sale rule again...

      The paperwork, at first, seems daunting but well worth the effort...

    • We're all waiting to see how the IRS handles the wash sale rule for active traders now that brokers began reporting cost basis in 2011. I"m a very active trader in individual equities and incur many wash sale scenarios, and to report all trades precisely according to the letter of the law is a mathematical undertaking of hurculean proportion. So for 2011, I rolled the dice that I wont be assaulted by a squad of tax goons spending days or weeks pouring through my returns for what ultimately is a revenue neutral outcome for the IRS. That's my intention for 2012 as well.

      If you are very concerned about this, on Monday you might try to elect active trader status for 2012 by filing form 475. This enables you to mark all positions to market at year end, and wash sales become a non event for you. You must meet IRS rules for active trader status so more professional advice than mine would be wise. But you have to act fast...the election must be made in this calendar year, and once made it can't be revoked. (Fwiw, I have not yet elected to file this way because it would mean losing some very long term capital loss carry forwards, so I have to wait until they're all absorbed)

      Its impt to remeber that a wash sale loss is not a loss denied...just delayed. The amount of the disallowed loss is added to the cost basis of your subsequent trade. So ultimately it all fades into irrelevance.

      • 2 Replies to chickyboy3
      • Chicky, that's a good point made...

        "Its impt to remeber that a wash sale loss is not a loss denied...just delayed. The amount of the disallowed loss is added to the cost basis of your subsequent trade. So ultimately it all fades into irrelevance."

        I figured out my own wash/sale adjustments last couple years using software called 'iScheduleD', only $30. Was using a tax accountant who's eyes rolled back under his eyelids like a great white when i asked him about wash sales. Definitely need a tax guy who's working with traders..

        Interesting thing is that my software gives you an amount that is deferred to the following year, like you said, yet there's nowhere on form 8969 to enter it. Gotta figure it out i guess


      • A few corrections and additions regarding declaring mark-to-market accounting (active trader status)...

        Actually, it's too late to declare for this year. That declaration must be made in advance, not at the end of the year. In order to be eligible, you have to send your declaration by April 15 of the first tax year in which you want to use M2M accounting. The April 15 deadline applies even if you get the 6 month extension to file.

        There's no form that needs to be filed to make this declaration. You just send the IRS a letter (which may be enclosed with your tax return if you're filing by April 15) stating that trading is your primary occupation and you'd like to declare active trader status under section 475(f) of the Internal Revenue Code. N.B.: Trading must be your primary occupation. If you have a job and just trade on the side, you're not eligible. However, once you've declared, the new accounting rules are permanent. If you later get a job and trade on the side, you continue to use M2M rules.

        You need to file a form 3115 (Application for Change in Accounting Method), but that doesn't get done in advance, it gets filed with the first tax return on which you're using M2M rules. However, you need to already have the 475(f) declaration on file from no later than April 15 of the applicable tax year.

        For example, if you want to declare M2M for tax year 2013 and on, you need to send your declaration letter by April 15 2013 (postmarked), then file form 3115 in 2014 along with your 2013 tax return.

        Active trader status has the following effects:
        - The wash sale rule no longer applies.
        - All your open positions get marked to market at the end of the year, i.e. you declare as if you had closed all those positions on December 31st and reopened them at the exact same price on January 1st.
        - You declare your trading gains and losses on 4797 (Sale of Business Property) rather than as captial gains/losses. A full itemization of your individual trades is not required, you just need to provide the totals for the year.
        - You can declare unlimited losses (no $3K per year limit).
        - Your trading activity is not eligible for long term capital gains rates. HOWEVER, you *can* designate certain accounts as investment rather than trading, and for those accounts you can remain eligible for long term capital gains rates (and all the regular accounting and filing rules apply to those accounts). You can make this designation in your initial declaration letter to the IRS, or send a letter at a later time, stating that M2M rules apply to such-and-such accounts, but that such-and-such other accounts are investment accounts. It's a very good idea to inform the IRS in advance of which accounts you consider investment accounts. If you do it after the fact, they might disallow it (for obvious reasons).

    • meant to say, 'may NOT be an issue for someone who's well capitalized'

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