Entering Trades on Form 8949

Form 8949 makes tax reporting of trades more complicated than ever for active traders and investors. Likely, congress had envisioned a simpler and more accurate reporting process when they passed cost basis reporting legislation. But the resulting IRS reality is far from simple. In this topic, we will discuss how trades must be reported for proper tax consequences, and problems with the IRS instructions for Form 8949.

Properly entering trades on Form 8949

It is very important to remember, despite what a broker reports on Form 1099-B, you are still obligated to maintain and report accurate trade history records. Your broker is NOT required to provide you with IRS-ready tax reporting! Specific rules for traders and investors reporting investment income and expenses (including capital gains and losses) can be found in IRS Publication 550. Form 1099-B is classified as third-party information which can assist you in completing the necessary filing as directed in Publication 550, but it does not take the place of your own accurate record keeping.

IMPORTANT NOTE: Most active traders CANNOT use 1099-B reporting alone in order to accurately complete Form 8949!

In order to 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 an accurate log of your actual trade history as reported by your broker. Trade description, date of trade, type of trade, cost basis or proceeds, commissions and fees – the 1099-B reporting does not contain all of this trade history.
2. TradeLog matches trades by default as FIFO (with the ability to specifically match lots if needed), and then calculates gains and losses based on that matching.
3. TradeLog also matches trades based on unequal buy/sell amounts according to wash sale rules – this is not done on 1099-B reporting.
4. TradeLog then adjusts for wash sales as outlined by Pub. 550 – on unequal trades, across stocks and options, across all accounts. 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.
5. TradeLog next classifies trades for reporting category A, B, or C and completes Form 8949 lines, totaling each section.

Major problems with IRS instructions for Form 8949

We have identified major problems with IRS instructions for Form 8949! Keep in mind, Publication 550 gives detailed rules for how capital gains and losses are calculated and wash sales adjusted. Form 8949 instructions suggest you do the following:

• Using your broker provided 1099-B, fill in each line on the Form 8949.
  • PROBLEM: there is no automated way to do this, so it must be done by manually entering each line. If you are an active trader that means likely thousands of entries!
• Next, it is your responsibility to confirm that the cost basis information your broker has reported is correct for each trade, and then make appropriate adjustments.
  • PROBLEM: to do this you will need a log of accurate cost basis data that you have kept (similar to what TradeLog records). Then you need to go line-by-line and compare what your broker reported on 1099-B, make adjustments and record on Form 8949.
  • ANOTHER PROBLEM: Your broker adjusts the cost basis on Form 1099-B for wash sale adjustments, however, they only have to report wash sale adjustments between identical CUSIPS and in a single account. They are also allowed to group together buys into one lot which can limit adjusting wash sales for unequal buy/sell amounts. However, you must adjust wash sales between stocks and options, and across all brokerage accounts – including IRA’s. You also must match trades to account for unequal buys and sells in order to properly adjust wash sales. In other words, it's possible that every single record on the 1099-B will be incorrect!

Bottom Line: The IRS on the one hand says to use your Broker 1099-B to fill out Form 8949. However, they require traders to report gains and losses and wash sales in greater detail than brokers can ever report on the 1099-B! If you were to use the 1099-B data and then go back to verify and adjust, you would very likely have to make an adjustment to every line of the Form 8949. No software program can handle this automatically.

TradeLog’s method of completing 8949 will assure you of this: your Form 8949 and subsequent taxable gain or loss on Schedule D reporting will be accurate according to IRS rules in Publication 550! Rather than starting with possibly incorrect 1099-B data, and then making you verify and adjust each line, TradeLog starts with accurate original cost basis, then makes IRS required adjustments to provide correct Form 8949 reporting. And TradeLog does use 1099-B to help reconcile your trade reporting for accuracy.