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Tax Reporting

You're familiar with gains and losses but are you familiar with the term "wash sale"? If not, then you need to be if you trade covered calls or collars on a monthly basis. You need to capture all this information for two basic reasons: (1) to determine your investment performance, and (2) to report it to the IRS on your tax return.

If you only have a few trades you can probably determine both with a self-developed spreadsheet. But if there are many trades, with wash sales, stock splits, reverse splits and spin-offs ... well, it can get pretty difficult, even for a CPA.

There is software that can be purchased online to help you. However, a few questions will obviously arise for the do-it-yourselfer:

• Do I know how to get the correct information into the software?

• What do I do with the output? How do I put it on my tax return?

• Is it correct? What do I tie the amounts to?

• When do I report December option sales?

• What about the closing of positions in January?

• If I trade multiple strategies for a stock or option, how are they reflected on my return?

The two most popular downloadable products are GainsKeeper® and TradeLog™. I have evaluated both with the following comments:

GainsKeeper®

• Free at some broker's websites (optionsXpress, thinkorswim) and at a minimum stock trading level

• Produces a Schedule D-1 that can be filed with your tax return

• No ability to format output, i.e., reporting in whole dollars only

• I used it for my data just to see how it performed ... it was off over $48,000 one year and over $25,000 the next year

• The majority of my clients who have used GainsKeeper also question its accuracy

TradeLog™

• Technically accurate and fast if input correctly
• Multiple input formats for multiple brokerages
• Technical support available online or via telephone

• TradeLog cannot handle spin-offs automatically (I haven't found a package that can)

• You need to understand and be good at:

1. downloading data from you broker,

2. capturing it in a particular file format, and

3. transferring it into the software

• If you have carryover, adjusted basis from a prior year, it must be input separately

• The output is a report that is attached to the tax return. Although technically correct, are you sure you completely understand it and if not, as a do-it-yourselfer, would you attach something to your tax return you don't completely understand?

• Here are some samples of TradeLog output including my comments (Note: Two of these examples were generated with a version of TradeLog purchased for 2006 tax returns so the errors and reporting may have been corrected)

• Sample 1

• Sample 2

• Compare with copies of our reports

• Here are updated samples of a TradeLog Schedule D-1 for 2010 compared to our reports, using the same data

• Input data

• TradeLog Schedule D-1

• Our Schedule D-1 (including supplementary reports)

• Tax implications summary

For active traders, more than 1500 transactions, the price is $297, and they suggest upgrading and/or renewing your license each year.

If the above concerns you ... let us prepare your Schedule D-1, Form 4797 or Form 6781 for you! Click here to get started ...

You also need to be aware that popular tax software, such as TurboTax® and online tax preparation software will NOT properly report options transactions, such as wash sales and assigned short puts.

Keys for Do-It-Yourselfers

You can perform many of the same functions that the above software packages can perform with a spreadsheet and some diligence. In fact, the software I use - it is more of a process - is a combination of Excel and Access. Here is the basic process:

1. Identify the data elements needed to completely report a transaction.

2. Develop a uniform system for identifying each trade, particularly if you trade options. The new Options Symbology Initiative has accomplished this for you. I have developed a template that will do this.

3. Make sure to include the open transactions from the prior year, if any.

4. Make sure you identify each of the opening and closing transactions. This is easy for stock, it is a Buy or a Sell Short and the corresponding Sell or Buy To Cover. For options it can be more difficult, especially if your broker (or your broker’s back office agent, ie, Penson Financial Services) does not provide a closing transaction if the option you opened expires worthless. Click here to see how this is handled.

5. Sort all your options transactions by OSI symbol first then by date.

6. Match the quantities on a FIFO (first-in, first-out) basis.

7. Once you have all transactions matched, agree your remaining open transactions to your December brokerage statement of option holdings.

8. Stock transactions will need to be evaluated for:

• Wash sales

• If they were acquired through put assignment

Option Trading Software

I have developed over the years a single Excel workbook with multiple tabs that allows me to perform in-depth due diligence and evaluate a stock both fundamentally and technically.

Also, I determine what strategy to use and my exit points before I enter the trade. After I execute the trade I can track it there as well and once exited, determine my return(s) and export the results in tax return format or to popular tax software.

I have developed demos of the process and published them on my YouTube and Screencast channels.

To view the demos and find out more about the software simply click here.