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Question

Wash sale issue for profitable trader

Forum|Forum|5 years ago
April 25, 2021
3 replies
0 views

Having an odd issue where as a profitable trader, because of wash sale rules, when I import my 1099B, TurboTax is saying that I owe ~1300% taxes on my profit (more than my net worth!). I think the wash sale rule is being misapplied in my case -- here is a simplified scenario:

All trades with same ticker.

Trade 1,Bought Dec 28 2020,Sold Dec 28 2020,loss $5

Trade 2,Bought Dec 28 2020,Sold Dec 28 2020,gain $10

Trade 3,Bought Jan 5 2021,Sold Jan 5 2021,gain $10

In the above scenario, what I think should happen is that the Trade 1 shows up as a wash sale, and is rolled into trade 2, giving me a net profit of $5 for 2020. However, what I think 1099B and/or TurboTax is doing is rolling the wash sale from Trade 1 into Trade 3, yet still charging me tax on Trade 2!

Any insights are appreciated. Thanks all.

hbl3973

Employee

MuMiX,

From what I see, TurboTax is handling it correctly. There were less than 30 days between the initial loss of the first trade and the purchase date of the third trade. So the loss on the first trade is not allowed to be applied to the second trade as you (again) replaced the equity sold with an essentially identical one. You have a profit of $10 on the second trade that is reported against 2020 income. If you do not repurchase the same stock within 30 days of the Jan 2021 sale, you can then apply the $5 loss to against the gain on the third trade for a profit of $5 to report on your 2021 tax return.

MuMiXAuthor

Thank you for the response. Here's another scenario. Let's say an individual has $100k to his name at the beginning of 2020 and decides to learn how to trade. He day trades high volume (many trades) on the same stock everyday through the end of the year into 2021. Let's say at the end of the 2020 year he is net profit of $100k, but due to wash sale rules, his gains are 3.3 million and his losses are 3.2 million. He is forced to pay taxes on 3.3 million with a tax burden of 1.3 million, and the 3.2 million in losses would carry forward to 2021 (and indefinitely). The individual obviously cannot afford 1.3 million in taxes now having only 200k to his name. The individual is also unlikely to make 3 million in gains in the next few years to offset the losses that would carry forward. And individuals cannot carry losses backwards, so the 2021 losses could not be applied back to the 2020 gains.

Unfortunately, I am the individual. Am I misunderstanding something or is the IRS about to force someone who made money to file bankruptcy because of a silly application of the wash sale rule? I was aware of the wash sale rule but I didn't think it applied to profitable traders... I thought the point was to stop tax loss harvesting, and here I am just trying to pay taxes on the money I made and they won't let me.

fanfare

Employee

you are misunderstanding and/or reporting incorrectly.

if you are an active trader, when you close the triggering transactions, your loss from wash sales is realized.

And this will be shown on your consolidated 1099-B. that means it is as if the wash sales never happened.

your effective disallowed loss then results solely from any triggering transactions that you still had open on Jan 1 2021. You cant deduct those loses, since they are disallowed.

Rick19744

Employee

If you are trading actively, I believe you need to make sure you understand the tax consequences of your trades and be able to track your basis; especially if you are trading the same stock and "double especially" if you are trading within that 30 day window of the wash sale rules.

You need to also determine if you are an investor, active trader or active trader with a Section 475 election in place. Because the later trader, known as trader tax status (with a 475 election), marks all open investments to market at the end of the year and all gains and losses are ordinary instead of capital gain / loss.

So at this point, since you just indicate that you are a trader, we have no idea which status you really fall into. Plus, this is a facts and circumstances test so this determination is beyond the scope of this forum.

If the wash sale rules apply, any disallowed loss on the first transaction is rolled into the basis of your next purchase and only apply if there is a loss. With you just providing the net gain or loss it is difficult to determine exactly how you are arriving at your figures.

Take a look at this high level discussion of the wash sale rules:

https://www.schwab.com/resource-center/insights/content/a-primer-on-wash-sales

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

MuMiXAuthor

I am eligible for Trader Status but I have not made the Mark-to-Market election. I believe you have to make that election prior to the year in which you want it to apply. So my gains would be treated as short-term capital gains instead of ordinary income.

I did not just provided my net gain or loss, I also provided the sum of my winning trades and the sum of the losing trades that would be disallowed in 2020 and realized in 2021. The sum of the winning trades that I would be taxed on is 3.3 million, and the wash sale losses that would be deferred to 2021 is 3.2 million. How did I come up with these numbers? 1099B and TurboTax. Therefore I would pay taxes on 3.3 million despite only making 100k net profit. The issue is that the disallowed loss from the first transaction would not simply roll into the "next" purchase, as I made many buys/sells throughout 2020 and into 2021, it would roll all the way into the most recent one until I stopped trading it. So if I daytraded all year and into January 2021 on the same ticker, all those losses would roll into 2021. I have read the IRS publications on the matter and it explicitly states that a loss cannot be rolled into a winning trade on the same day if you have a later purchase of the same ticker within 30 days. You aren't allowed to use the net gain for the a single day -- you have to separate the wins and losses on that given day. So if on a given day (such as last trading day in 2020), you day trade the same ticker with 100 round trips, and end up with $100k for the sum of the winning trades, and $95k for the losing trades... and you traded the same ticker in January 2021... you would pay taxes on the $100k and roll the $95k losses forward to 2021.

At this time, I think my only options are to hire a CPA/Tax laywer to ask for some kind of waiver/exception. The tax bill is too high (I think) for applying for payments and also I would have too much money for applying for a financial hardship. This is a complete mess!

I hope this message reaches other traders -- please be very careful about wash sale rules!!!

jgr21

What did you find out from your CPA? I'm in exactly the same boat, but my accountant says it doesn't work like that and that I show a 17k loss. I'm curious as to what you were told. Your scenario, just like mine, almost gave me a heart attack.

Mr Washsale

I feel your pain. So looking at TD Ameritrade how do you know the wash sale damage around Dec if you keep the trade open or closed? I want to see what is being wash sale amount is disallowed? This is the figure that makes turbo tax go up.

Thanks for the help

Mike9241

The question of how to determine how much you have in deferred losses due to wash sales might be best directed to TD which I believe is now part of Schwab.

perhaps you get a statement of your open positions showing tax basis at the end of any day you choose. for long positions, you would need to know what you actually paid. the difference between the tax basis and what you paid would likely be the deferred wash sale amount on long positions. For short positions it would be the opposite, what you sold them for vs tax basis.

I realized this may be impractical if you have many open positions. Perhaps Quicken or Quickbooks which would only be able to show you the taxable net gain or loss but not the deferred wash sale losses if importing/downloading of the transactions is possible.

Wash sales on short sales can be complex, if you like read this thread

https://fairmark.com/investment-taxation/capital-gain/wash/short-sales/

Perhaps you should consult a tax pro as to the advisability of making the M-T-M election if you qualify.

Mr Washsale

Thanks I just ordered the book. I tried calling TD but it has been difficult get answers or difffernet answers. Not everyone has transferred to Schwab yet. Mid year 2024 for me.

Once you carry over a wash sale by repurchasing the the same stock I am assuming you can only recapture those phantom tax by closing the trade wait 31 days and then have gains in the same stock?

or does other gains offset the losses, maxe 3k a year?

any good books on correcting the error or making up for it ?

I ws thinking of just closing the trades waiting 31 days and then have large divideneds to offset but it seams that these could be eventually long term and not the short term losses from the wash sale.

any good books on correcting the error or making up for it (correcting to make whole)?

Thanks.