Be Kind To Your Accountant - Get Started on Your Taxes Now!

Published: February 10, 2017
Tagged: 2016 taxes, investor, active trader, trading, IRS tax forms, 1099-B, Schedule D, Form 8949, TradeLog, trader taxes, Mark-to-Market, wash sales

Smiling Accountant


Individual income taxes are due on April 18th this year. This is NOT a typo! Why did the IRS set the deadline for April 18th rather than April 15th? The 15th falls on a Saturday and the Washington D.C. Emancipation Day holiday is being observed on Monday, April 17th rather than on April 16, 2017. Tax Day is on the following Tuesday.

This is great news for taxpayers! You get an extra business day...and the weekend....to wrap up your taxes before the deadline. This is not so great for your accountant, however, as they are losing another weekend! So be kind to your accountant and get a head start on reconciling your trades and compiling your gains and losses for your 2016 tax return.

The IRS released Publication 550 "Investment Income and Expenses" earlier this year and there are some reporting changes investors and active traders need to be aware of.

What forms will investors need?

IRS Schedule D and Form 8949 The IRS requires most active traders and investors who file a Schedule D to report their detailed trade history on “ Form 8949 - Sales and Other Dispositions of Capital Assets”. The Schedule D was redesigned to work with Form 8949 and now functions as a summary of all capital gains transactions.

Just like the Schedule D, there are two sections covering both long-term and short-term transactions on Form 8949. After calculating the total gain or loss for both categories, you would then transfer the amounts to your Schedule D and then to your Form 1040.

The following securities are reported on Schedule D:

Form 8949 requires that you report the details of each transaction including the name of the company to which the stock relates, the date you acquired and sold the stock, your cost basis in the position and the sales price.

A caution about cost basis: Brokers are required to report the "adjusted" cost basis for various securities and indicate whether the gains are short-term or long-term on Form 1099-B. Sounds easy enough, but there's a catch. Reporting requirements for brokers, dealers, banks, custodians, and transfer agents are not always the same as they are for their clients. Brokers will generally provide your cost basis as the original purchase price you paid for an investment, plus commissions and any fees. The IRS expects taxpayers to adjust their cost basis for wash sales, amortization, accretion, and corporate actions. Regardless of what your broker reports to the IRS, you remain responsible for reporting your adjusted cost basis information every year on Form 1040, Schedule D, for all shares sold, whether they're covered or non-covered, short- or long-term . You should use your own records in addition to the cost basis information provided by your broker and make adjustments where needed to ensure your tax reporting meets the requirements.

Read our Comprehensive Guide to Understanding Form 8949

Thankfully, the IRS Form 8949 for 2016 is almost identical to the form provided for the previous tax year! The only differences between the forms were very minor changes in wording. The current version of TradeLog® provides all of the trader tax forms you will need to file your 2016 return.

IRS Form 1099-B
Your broker should send you a Form 1099-B for each year that you have investment gains or losses in your accounts. This form is used to report the acquisition date and tax basis (your cost basis) of stocks, bonds, mutual funds, regulated futures contracts and other securities to the IRS and indicate whether the capital gains were short-term or long-term. For investors and active traders, your broker will generally send out a consolidated 1099-B where the details of each sale are broken out by line item. Often this statement will also include other reporting from the broker such as 1099-INT, 1099-DIV, and 1099-OID.

As IRS regulations and the 1099-B instructions continue to evolve, you will continue to see changes to the format of your Form 1099-B. For the 2016 tax year, boxes have been added and some box titles have been changed:

In addition, the last phase of the Emergency Economic Stabilization Act of 2008 requires brokers to now report cost basis of what the IRS calls "more complex" debt instruments that do not have a fixed yield or maturity date and option contracts purchased on and after January 1, 2016. Below is a list of the more complex debt instruments you will see reported on your Form 1099-B for the 2016 tax year:

The IRS made a permanent exemption for factor bonds and short-term debt (fixed maturity dates of less than a year from issuance) from the legislation. These security types will remain "non-covered". Each transaction on your 1099-B should be designated as "covered" or "non-covered". Whether a broker is required to provide cost basis information depends on whether the IRS determines an investment to be a "covered security" or not for that particular tax year.

Thinking about simply sending in your broker 1099-B with your tax return? Here are a few things to consider:

Watch out for wash sales on your 1099-B : Brokers are only required to make some of the possible wash sale adjustments that taxpayers must consider when filing their income tax returns and often will not make these adjustments when the purchases and sales occur in different accounts or when they're between what the IRS considers to be "substantially identical securities" that have different CUSIP numbers.

Short sales closed at year-end may not be reported properly : Brokers are not required to apply the Constructive Sale Rule when reporting short sales on 1099-B. They generally use settlement date when closing a short position. However, a few brokers use the actual trade date when closing a short position. Taxpayers need to make sure that these short sales are reported on the Form 8949 for the correct tax year, regardless of whether their broker included it on Form 1099-B for the correct year or not.

Cost basis for securities acquired prior to 2011 is not required on 1099-B : Some brokers provide this data, most do not. In addition, brokers generally do not keep track of your cost basis for holdings transferred into your account from another brokerage firm or financial institution so this necessary information will most likely not be reported on your 1099-B.

In order to help taxpayers fully comply with IRS tax reporting requirements as outlined in Publication 550, TradeLog® uses the following process for entering trades on Form 8949:

  1. TradeLog® keeps a detailed log of your actual trade history as reported by your broker. This includes: trade description, date of trade, type of trade, original cost basis or proceeds, commissions and fees. The BaseLine Positions Wizard in TradeLog® minimizes the amount of manual entry needed to accurately report your cost basis.
  2. TradeLog® matches trades by default using the IRS "first-in, first-out" (FIFO) method, with the ability to specifically match tax lots where needed, and then calculates gains and losses based on the matched transactions. Trades are also matched based on unequal buy/sell amounts according to wash sale rules, often not found on 1099-B reporting.
  3. TradeLog then adjusts for wash sales as outlined by Publication 550 – on unequal trades, across stocks and options, across all accounts. It then makes the necessary adjustments to gains and losses according to IRS rules – 1099-B reporting only makes limited wash sale adjustments and is not adjusted according to requirements for Form 8949 filing.
  4. TradeLog® next classifies trades for reporting category A, B, or C (short-term) or D, E, or F (long-term), and completes Form 8949 lines, totaling each section to simplify the completion of your Schedule D.

IRS Form 6781
Some securities are classified as Section 1256 contracts and are therefore not reported on Schedule D. These securities are reported on IRS Form 6781 "Gains and Losses from Section 1256 Contracts and Straddles" with totals flowing onto IRS Schedule D:

FOREX : Foreign Exchange Market trades are not reported to the IRS with the same method as stocks and options or futures. FOREX trades are considered by the IRS as simple interest and the gain or loss is reported as “other income” on Form 1040 (line 21 ).

What if I have elected "trader status" with the IRS?

IRS Form 4797 A trader in securities or commodities may elect under IRS Section 475(f) to use the "mark-to-market" (MTM) method of accounting for securities or commodities held in connection with a trading business. Under this method, any security or commodity held at the end of the tax year is treated as sold (and re-acquired) at its fair market value (FMV) on the last business day of that year.

Those who have made this election for "business treatment" with the IRS record their trade activity on IRS Form 4797 "Sales of Business Property".

Read more about the Mark-to-Market election .

was initially designed to meet the specific tax needs of active traders in securities who have elected or are about to elect the mark-to-market accounting method, or who trade Section 1256 contracts .

In addition to automating the process of importing your trades from your online broker and matching them properly for attaching to your Form 4797, TradeLog® provides all of the necessary mark-to-market accounting procedures and transitional reports and forms which greatly simplifies the filing of your trader tax return.

Getting started on your trader tax return now may help eliminate the need to file an extension. If you file an extension but don't pay what you owe if you have a balance due, the IRS will charge you interest and penalties on the outstanding tax bill. Get started early so you don't feel pressured to cut corners to meet the deadline. Give yourself enough time to get the job done right! Your accountant will love you for it.

Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Cogenta Computing, Inc. does not make investment recommendations nor provide financial, tax or legal advice. You are solely responsible for your investment and tax reporting decisions. Please consult your tax advisor or accountant to discuss your specific situation.