One IRS Instruction Has Massive Implications for Traders

Published: June 30, 2014
Tagged: Trader Taxes, Wash Sales, Form 8949, 1099-B

One sentence changes everything. You may think completing Form 8949 for Schedule D is pretty straight forward, but the majority of active traders are affected by one instruction which has some massive implications. We'll reveal this instruction and explain three situations in which it affects most traders. And we'll tell you about the implications you need to be aware of.

The IRS requires additional wash sale adjustments for Form 8949 – adjustments not reported on 1099-B.

At first glance, you may get the impression from the Form 8949 instructions that you can simply use what is reported on the 1099-B. But look carefully! On page 7 of the 2013 Form 8949 Instructions you will find that the IRS directs:

That one sentence of instruction will lead you to major implications. In the 2013 Schedule D instructions, page D-5 you find this important requirement:

IRS Publication 550 explains wash sales in detail. Many traders do not realize that the IRS has different wash sale rules for brokers than they do for taxpayers. While your broker is required to report some wash sales on 1099- B only for covered securities and in specific situations, you as a taxpayer are required to make all of the additional wash sale adjustments defined by tax law.

In a recent survey, 85% of traders had one or more situations which require these additional wash sale adjustments to be made for Form 8949 – adjustments which are not reported on the broker-provided 1099-B. The majority of traders who have these situations cannot rely on the 1099-B for complete tax reporting.

Three key situations may result in additional wash sales for Form 8949.

When would a wash sale not be reported on Form 1099-B? We've grouped the top three situations below. If any one of these situations applies to you then you are required to check for and report additional wash sale adjustments not on the 1099-B:

1. You trade options. The IRS rules for taxpayers may result in wash sales:
   1. between trades for the identical option,
   2. between trades on other options for the same underlying security,
   3. between trades of the options and the underlying stock.
   
   Noteworthy: Even when brokers begin reporting options trades on the 1099-B for 2014 tax year they are still only required to adjust wash sales in the first scenario listed – between identical options (same CUSIP). Since most traders buy and sell more than one option, this will continue to be the number one reason active traders need software like TradeLog for generating Form 8949 accurately.
2. You trade the same stock or options on that stock in more than one taxable account. Even if all of your accounts are at the same brokerage house, the IRS does not require the broker to adjust for wash sales across accounts – but they do require you as a taxpayer to do so.
3. You have an IRA in which you trade stocks or options on the same security as you do in a taxable account. The IRS has specific – and always harmful – rules for wash sales triggered by IRA trades. Brokers do not report IRA trades to the IRS. Therefore, it is your responsibility to identify and adjust for any IRA wash sales.

These are the top three situations; you may have other situations which can also result in additional wash sale adjustments.

What are the implications of additional wash sale adjustments?

This is how the requirement may affect you:

• Form 8949 cannot be completed using only the 1099-B.
  Most traders cannot simply use their 1099-B for tax reporting. In fact, it is often impossible to use the 1099-B because its limited reporting does not allow for identification of additional wash sales. If you are using a tax preparer, are they aware of this requirement and the limitations of 1099-B?
• Most popular tax software programs do not make additional wash sale adjustments.
  If you are using a popular tax software program like TurboTax®, read the fine print. Most popular tax software programs simply import broker-provided 1099-B information and do NOT automatically identify and adjust for the additional wash sales – you are required to do this manually, or use a third-party solution such as TradeLog Software.
• Form 8949 will not match the 1099-B.
  It’s also important to note that any additional adjustments will change both cost basis and adjustment amounts reported on Form 8949, making them different from the 1099-B. The additional wash sales may also alter your taxable gains/losses if you end up deferring more losses at year end, or worse, have permanently disallowed losses because of IRA trades. Some taxpayers struggle for hours trying to determine why their Form 8949 generated by software like TradeLog still doesn’t match the 1099-B – not realizing that the two will likely never match because of the IRS requirements.

Accurate tax reporting is your responsibility – not your broker's.

The clear reminder carried on most every 1099-B and in IRS publications is that you are ultimately responsible for an accurate tax return. Brokers are required to report the limited wash sales on 1099-B which may assist you – and gives the IRS some idea of what to expect from your reporting. However, you cannot use the excuse "that is what my broker reported" if the IRS finds your Form 8949 is incomplete.

TradeLog uses a proven method for generating accurate Schedule D Form 8949 reporting – which has been used by active traders and tax experts for over 14 years. And we are proud to say that we have never had the IRS reject TradeLog reporting.

One seemingly minor IRS instruction has a huge affect on the majority of traders. If you are required to file a Schedule D Form 8949, make sure to review the wash sale situations that affect you and ensure that you have a method for generating an accurate Form 8949. You may also want to check out our Definitive Guides to 1099-B, Schedule D Form 8949, and Wash Sales in order to better understand the tax issues affecting you.