Common Investor Tax Misconceptions

Filing your taxes from stocks and options trading can be a daunting task, especially when it comes to filling out an accurate schedule d. And it may come as no surprise that the IRS schedule d is one of the most complicated of any of the current IRS tax forms!

With today’s easy access to online stock and option trading, many individuals find themselves having to deal with hundreds or even thousands of trade transactions that need to be reconciled and entered on their schedule d at year end. The days of buying one or two stocks per year and then selling once every couple of years to replace lower performing stocks are virtually gone.

But what is of more concern is that many traders over-simplify this complex task. There is an enormous amount of misinformation floating around the web about how to accurately prepare your capital gains or losses from investing or trading, and using this to file your taxes.

Here are some of the more popular misconceptions:

• I can report my gross sales, total costs, and net gain or loss as one line item on my schedule d.

  This is wrong and the IRS has taken a strong stand on this the last few years. Please read the Tax Update dated Jan 8, 2006 by Ed Zollars, CPA. We have had many users purchase our TradeLog software because they reported their trading gains this way and are now being audited for previous tax years.

• I can take my broker provided gain/loss statement and use that as my schedule d details.

  This also leads to trouble as most broker provided gain or loss statements are inaccurate! I know this is hard to believe, but please read on.

• I can import my trades directly from my broker into any popular tax software program and get an accurate schedule d.

  This too is wrong because in most cases the data imported comes from the brokers inaccurate gain or loss statement.

• My tax software calculates wash sales.

  None of the popular "made for the masses" tax software programs calculate wash sales.  They depend on the imported brokerage data to do this and most broker provided statements do not provide wash sale calculations. Those that do usually are in error and may over or understate your disallowed losses.

Understand the problems with broker provided gain and loss reports.