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The Options Tax Guy

  • How do I report my expenses as a Trader in Securities?
    A Trader in Securities reports trading expenses on Form 1040 Schedule C. The only trick to reporting on Schedule C is the home office deduction which must be reported as an "Other expense" but clearly described as, for instance, "Home office for Trader in Securities". This is necessary because the home office deduction is not applicable if the Schedule C shows a loss. Additionally, if your trading for the year results in a net loss, the home office deduction should not be entered.
  • I sold a security for a loss on the last trading day of the year and it is still on my year-end statement from my broker. What can I do?
    This may occur because the year-end statement is based on settlement date and not trade date, which is what triggers tax. Check your Form 1099-B to make sure it is reported on that form. If not, add it to your Form 8949. Remember to exclude it the next year.
  • Can I have an investment account and a Trader in Securities account if I want to hold on to my long-term gains?
    Yes; You need to open two or more accounts and designate one as an investment account and the other(s) as trading accounts. Place notes in your permanent tax file describing the intention of each account
  • Can I form a Limited Liability Company and deduct more expenses than as an individual?
    I heard an un-informed individual at an options conference where I was speaking who told another conference participant that he just "formed an LLC and deducted everything." During my presentation I made sure to inform all in attendance that this was absolutely not the case. Forming an entity does not magically create expenses. You can deduct the formation costs and it may be easier to implement some benefit plans but compliance costs and state minimum taxes may impact the decision.
  • Can a loss on the sale of an option result in a wash sale?
    Yes, if a loss is recognized on the sale of an option and then you enter into a trade using the SAME underlying security, the SAME strike price and the SAME expiration date, that will result in a wash sale because it is the SAME option, which is substantially identical to itself. For instance, you are long a 4/21/2023 Tesla 150 call. If you sell that call at a loss, then enter into another 4/21/2023 Tesla 150 call, that will result in a wash sale ... until 4/21/2023 when that security will no longer exist. If you roll to a 5/19/2023 Tesla 145 call then you do not have a wash sale since a 4/21/2023 Tesla 150 call is not substantially identical to a 5/19/2023 Tesla 145 call and that is because of the greeks. If you "roll" your option to a different strike price or expiration date, it is very arguable that you have not replaced the loss option with an option that is substantially identical.
  • Can I have a wash sale if I am trading publicly traded partnerships (PTP)?
    Yes, a PTP is no different from any asset that has basis. However, if you have held the PTP for very long, you may have received distributions from the PTP which will decrease basis. Check your brokerage statement or more accurately, the Schedule K-1 received from the PTP, line 19.
  • If there is a loss sale on 12/18/X0; A short put is sold on 1/16/X1 with a 2/15/X1 expiration date - outside the 30-day wash sale window - is there a wash sale?
    Yes; the rule states that if you enter into an option contract to buy the loss security within 30 days of the loss, that results in a wash sale. The contracts involved would therefore be any option to BUY the underlying security, thus, a long call or short put.
  • What if the wash sales on Form 1099-B do not agree to your records?
    This will probably occur as a result of a discrepancy in cost basis. First, make sure your records are correct. The 1099-B may be incorrect if you change brokers and the cost basis is not properly transferred to the new broker. Try to determine how the wash sale on the 1099-B was calculated, a task easier said than done. The best way is with a spreadsheet. If you are convinced the 1099-B is incorrect, use Form 8949, columns (f) and (g) to correct the inaccurate amount. Input the "B" code for basis and the amount, as either a positive or negative, to correct your gain or loss. The calculation is as follows: Gross proceeds - Cost basis + Adjustments = Net gain or loss.
  • Who is eligible to elect to be taxed as a MTM trader?
    According to IRC Sec 475(f), a "trader in securities" may elect to be taxed as a mark to market trader. Therefore, one must meet the trader in security threshold before electing MTM. This means that their trading must be regular and consistent and of sufficient volume. Also, a MTM election may be made by a trader for a newly created entity.
  • What if I file my tax return before the original due date and forget to attach my MTM election. Can I still elect MTM?
    There is not a lot of guidance for a situation like this. Essentially, you have filed your Federal tax return before April 15 and forgotten to attach the MTM election. In general, Rev Proc 99-17 specifically states "The statement must be filed not later than the due date (without regard to extensions) of the original federal income tax return for the taxable year immediately preceding the election year ..." There is no mention of filing with the tax return or the extension. Therefore, what I suggest is to prepare the election and mail it certified mail, by April 15, to the IRS campus where your tax return will be processed. You can find that address in the instructions for Form 1040. Place a copy of the MTM election and certified mail receipt with your tax return records for that year. Then, trade as a MTM trader.
  • If I have net capital loss carryforwards, should I elect MTM?
    As most things in tax, it depends. Primarily it depends on the size of the loss carryforward. Once MTM is elected, the loss carryforward cannot be used in the MTM tax years. Therefore, if the loss is over $10,000 it will take over three years to use up the loss at $3000 allowed per year. Therefore, the loss carryforward should be able to be used up within about 3-5 years in my opinion.
  • Are there any extensions available to elect MTM?
    No, the MTM election is due by the date of the original tax return or extension - typically March 15 or April 15 - and the election date cannot be extended. This is because it places the government's position in jeopardy if a taxpayer has over on-half the year to experience losses then make an election with 20-20 hindsight. Further, the election deadline for a new entity is 2-1/2 months after the formation of the entity. Keep the election form in your permanent tax file and attach it to the tax return for the first year of the new entity.
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