Q&A: How to deal with the wash sale rule & trader tax status

Many traders do not understand wash sale rules; failing to do so can lead to huge tax problems. Below is the definition of wash sales and how to account for them according to the IRS.

Wash Sales

You cannot deduct losses from sales or trades of stock or securities in a wash sale.

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

  1. Buy substantially identical stock or securities,
  2. Acquire substantially identical stock or securities in a fully taxable trade,
  3. Acquire a contract or option to buy substantially identical stock or securities, or
  4. Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.

If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities begins on the same day as the holding period of the stock or securities sold.

In the video I describe how I use a program, Tradelog, to account for wash sales. Another option is to become a mark-to-market (MTM) trader. To be a MTM trader you must fit the criteria to have trader tax status (as opposed to investor tax status).

Disclosure: No positions in any stock mentioned or shown. I am a client of Robert Green’s CPA firm. I am not a tax professional. This blog has a terms of use and you can find all my disclaimers and disclosures there as well; my full terms of use is incorporated by reference into this post.

0 thoughts on “Q&A: How to deal with the wash sale rule & trader tax status”

  1. I do about 30 trades per month since i am under the PDT rules. I started last June. Should i still get tradelog or do it by hand with turbotax or something?

  2. turbotax will import Gainskeeper data.

    Gainskeeper will create a sch-D form and track wash sales.

    Does a few other things as well.
    Cost depends on your use – yearly fee.

  3. I could be wrong but I don’t think it really matters in the long run. You should still end up paying the same amount in taxes in the long run, it’s just a matter of when you pay them. If for some reason youre trying to minimize your taxes in the current year, and therefore you want to carry some gains over to the next year that would otherwise not carry over due to wash sale rules, then by all means do it. But if you don’t really care which year you end up paying the taxes, then why would you care?

    I hate accounting so I usually just let turbotax import all my trade data and spit out the sch-D for me.

    Anyhow, it’s nice you brought it up and it would be cool if you did another video or two going into more detail on what you can do with Tradelog.

    And keep AFFX on your watchlist…it looks like it might fade through $7 and it was easy to borrow (but maybe not so much anymore).
    Did Sogo have ATHX today? I wanted that one but no shortables available with my broker.

  4. I’ve heard there may be some issues with how turbotax calculates wash sales, if the amount you buy/sell changes from the original trade. I’ve tried using turbotax online to enter information, and it’s been a big hassle.

  5. reaper,
    how are you doing your taxes with sogotrade? they only allow export in PDF format..dunno how to get it into turbotax…please help

    allen

  6. reaper, do you know if you can file as trader status while also collecting unemployment? i got the green tax guide, but it doesn’t mention this

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