Other Wash Sale Topics
There are several other “one-off” wash sale topics I have encountered that will be covered here.
Other topics will be added so check back often!!
Corporate Mergers
The issue sometimes arises where a predecessor corporation was traded and wash sales were generated. The predecessor corporation was then merged with or purchased by another corporation and the shareholder now has shares of the successor corporation. What happens to the wash sales contained in the predecessor corporation?
Believe it or not this situation occurs more frequently than one would think? There is no real guidance in IRC Sec 1091 regarding this situation, neither do the regulations and case law provide much guidance.
For the scientists and engineers reading this - who also tend to be very detailed and deliberate traders - stock basis in this regard is similar to the First Law of Thermodynamics, which basically states that energy, in an isolated system, can change form but neither be created nor destroyed.
In similar fashion, basis is neither created nor diminished in a non-taxable acquisition or merger. If cash is received in lieu of fractional shares of stock that becomes taxable but there is still basis in the fractional shares.
If a shareholder or security holder surrenders a share of stock or a security in an exchange under the terms of [IRC] Section 354, 355, or 356, the basis of each share of stock or security received in the exchange shall be the same as the basis of the share or shares of stock or security or securities (or allocable portions thereof) exchanged therefor Reg Sec 1.358-2(a)(2)(i)
If one share of stock or security is received in exchange for more than one share of stock or security or if a fraction of a share of stock or security is received, then the basis of the shares of stock or securities surrendered must be allocated to the shares of stock or securities (or allocable portions thereof) received in a manner that reflects, to the greatest extent possible, that a share of stock or security received is received in respect of shares of stock or securities that were acquired on the same date and at the same price. Reg Sec 1.358-2(a)(2)(i)
So, let’s apply this principle by way of example.
Example
Let’s say you have 900 shares of GoPro (GPRO) and you have been systematically trading it with options and each of your purchases and sales occur on expiration Friday. Because of its decline during 2015 you have wash sales in most of the shares so that your purchase price in the 900 shares is $40,685 but you have a total of $8,469 in wash sales. Therefore, your basis is $49,154.
Now, in December 2015 Apple (AAPL) decides to purchase GPRO to integrate its technology into their smartphones. At the time of the acquisition GPRO is selling for $30 per share and AAPL is selling for $120 per share. Apple offers $40 per share in an all stock acquisition and the transaction is consummated.
So each GoPro shareholder will receive 1 share of AAPL for every 3 shares of GPRO owned.
In our example, we own 900 shares of GPRO with a basis of $49,154. Basis before the transaction (from a per share perspective) cannot change as a result of the acquisition. Thus, we will now have 300 shares of AAPL (900 shares of GPRO / 3 shares of GPRO relinquished for every share of AAPL exchanged) with a basis of $49,154.
So now, each share of AAPL has a basis of $163.85 ($49,154 / 300)
The holding period, according to Regulations, is the same date as the original purchase dates of the GPRO stock.
The transactions and resulting successor stock positions are shown in this table.
Brokerage Account Opened and Closed in Same Year
In my opinion, here is one of the only opportunities to ignore the Wash Sale rules - the opening, funding, trading and ultimate closing of a brokerage account within the same calendar year.
As the icon at left suggests, the investor/trader has experienced substantial losses during a short period in the market and decides that trading is not for them.
While employing an option trading strategy where stock was assigned and exercised, wash sales were generated. Ignoring the wash sales rules in this scenario - where the brokerage account was BOTH opened and closed in the same year - depends highly on how the trades were reported on the Form 1099-B.
Clicking on the three links will display:
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The Form 1099-B from the clearing firm of the brokerage
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The actual Raw Trades and cash transactions
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The Form 8949 using Exception 2 reporting for the trades
What you will notice by examining the 1099-B versus the raw trades is that the TOTALS are materially different ... $20,046 versus $66,198.
This is actual data (Names and Account Numbers removed) and I am not sure who was responsible for the error - the brokerage or the back office clearing firm - but the 1099 shows a number of corrections designated as “CORR”. You will also notice a significant number of Wash Sales designated as “W” under ‘Code’. But since this account was both opened and closed in the same calendar year AND the 1099 is apparently incorrect, the Wash Sales will be ignored. The Form 8949 attempts to note the adjustments as necessary.
Any expirations or assignments, do not appear as Closing transactions and are noted in the ‘Additional Information’ column. There are really no tax ramifications to these closing transactions since assignments and exercises are closed for zero dollar amounts. As mentioned previously however, they are typically used to determine the open positions at year-end.
A couple of comments about the Form 8949:
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It does not look like the typical IRS Form 8949. This reporting uses ‘Exception 2’ in the instruction for Form 8949 regarding the reporting of each transaction on an attached statement that contains “all the same information as Parts I and II and in a similar format”.
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The Totals on the substitute Form 8949 do not agree the the sum of all the trades on the Raw Trades pdf. This is because of rounding. There were almost 700 transactions - which translates to over 1400 “raw trade” line items.
Using Form 8949 and/or Schedule D
This topic is actually covered in the instructions for Form 8949 and in Publication 550 and even though it does not address wash sales, per se, it is a related issue.
Form 8949 is used to reconcile amounts reported to you on Form 1099-B to the amounts you report on your tax return. If there are any adjustments they are noted in the ‘Adjustment’ column with the appropriate code and amount, then reported on Schedule D and subsequently on Form 1040.
Here is a brief summary of the reporting requirements:
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You do not have to file Schedule D if all you are reporting are ‘Capital Gain Distributions’ reported to you of Form 1099-DIV.
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You do not need to file Form 8949 if one of the following applies to your tax situation:
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You only have a capital loss carryover
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You have gains or losses from certain other forms
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You have a flow-through loss from an S Corp, partnership or trust
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You received a 1099-B and no adjustments are necessary
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Multiple Brokerages
This information can also be used when, as previously discussed, you have multiple brokerages and there are no adjustments necessary for one brokerage but there are for another. Simply complete the Form 8949 and carry the totals to Schedule D and add the amounts to those totals for the brokerage not requiring any adjustment.
In recent discussions with several Revenue Agents, most simply tie gross proceeds reported on Schedule D to Form 1099-B amounts.
Wash Sales on 1099-B After MTM Election
So you have made the Mark-to-Market election and traded all year.
You know you have made the election, the IRS knows you have made the election - because you sent it in with your extension/tax return via certified mail - but your broker does not know, and probably does not care.
However, you certainly care because the 1099-B you receive from them or their clearing firm reflects all transactions as if you had NOT made the MTM election and is provided to IRS.
So, can you simply ignore the sales marked with “W” or noted as a “Wash Sale” in the margin? Probably not.
Why not? Because it may not be evident which shares of subsequently sold stock contains the wash sale that was rolled into the basis of the newly acquired shares.
Further, the open positions from the immediately prior year have been “marked to market” via your Sec 481(a) adjustment and the broker will not have that information reflected on the 1099-B as well.
So, what can you do?
Many brokerages allow you to download the raw trades into some type of common data format ... comma separated values (.csv) or even directly into an Excel® file.
If that is the case, you are in great shape! All you need to do at that point is adjust the basis of the open positions to the market price on Jan 1 of the current year (Dec 31 of the prior year for all practical purposes) and then adjust the current year-end values to market as of Dec 31 of the current year.
Once that is accomplished you will be able to sum the ‘Amount’ column and you will have the net gain or loss for the year. You would need to separate any trades that, by definition, are reported on Form 6781, such as cash-settled index options, and then report the remaining trades on Form 4797.
Although somewhat self-serving, you might consider one or both of the following:
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You might consider using the Option Traders Template® also in order to keep track of your trades and then compare that detail to the download from your broker.
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Using the MTM Election template is also a very good idea in this case as well, in order to keep track of your actual mark-to-market adjustments.
Trading Publicly Traded Partnerships
Publicly Traded Partnerships (PTPs) were - and still are - called Master Limited Partnerships (MLPs) years ago.
Publicly Traded Partnerships combine the tax benefits of limited partnerships with the transferability and liquidity of a publicly traded security, such as IBM.
Without going into the extensive tax issues involved, there are a few things a trader needs to know about PTPs:
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Any losses from the PTP can only be offset by gains/income from the SAME PTP. In other words, a loss in PTP AlphaOne cannot offset income from PTP BetaTwo.
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In a number of instances, one PTP may own 100% of another smaller PTP. Each of those PTPs can only offset income and loss between the same PTP, as in the above point - even though they are part of the SAME “parent” PTP.
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PTPs may be purchased through multiple brokerages. In that case, there is the potential for trading the PTP under the same scenario discussed elsewhere with wash sales in multiple brokerages. Not only is there the potential for wash sale issues but the necessity of matching the income and loss for the same PTP and various basis considerations, as mentioned below.
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Since PTPs are publicly traded, many traders stumble into ownership by selling puts and obligating themselves to purchase units (not shares) in the PTP. So all the option basis and proceed rules discussed on this website are applicable to PTPs.
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At year-end, the PTP trader will receive Form 1065, Schedule K-1 from the PTP. Many traders simply do not know how to incorporate the information from this form into their tax returns. And if there have been any distributions during the current or in prior years, basis will probably need to be adjusted. The sale of the PTP will then end up being reported on Form 4797 as well as Form 8949.
My advice to you is basically, if you find yourself invested in a PTP you should probably not prepare your own tax return and should have a professional prepare it for you. It is especially important to obtain this assistance the FIRST year of owning the PTP so that basis adjustments can be tracked as well as gains and losses across each PTP.