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Software

You will need a template or off-the-shelf software in order to manipulate the large amount of trading data generated throughout the year.  So, what's available ...

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 stock or options on a weekly/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?

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 assignments and exercises.

 
 
Widely Available Tax Reporting Software

The two most popular downloadable products are GainsKeeper® and TradeLog™ available at your brokerage and for purchase, respectively.  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 Form 8949/Schedule D 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 (however see 2011)

  • 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?

I purchased a version of TradeLog in 2006 to evaluate and found a number of errors that were probably corrected in subsequnt versions.  However, I downloaded a trial version in 2011 and used the same data to compare our reporting versus TradeLog.  TradeLog missed a wash sale and doubled another wash sale adjustment for this client's Schedule D.  Fortunately he sent the information to us to be reviewd and we caught these errors.  Additionally, our fees were $10 more than the cost of the TradeLog software.

TradeLog Form 8949/Schedule D with Input Data

Our Form 8949/Schedule D

 
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 process I use is a combination of Excel and Access.

 

Here is the basic process:

  1. Identify the data elements needed to completely report a transaction, see Doing It Yourself

  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 trade date.  Remember that taxable transactions are based on Trade Date not Settlement Date.

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

  7. Once you have all transactions matched, reconcile 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/call exercise
•  If they were sold via option call assignment/put exercise

Once you have accomplished these procedures, you may have all the information needed to file your tax return.

So, are you required to use Form 8949?  No, according to the IRS instructions for Form 8949 you do not need to report every transaction on a separate row as long as all the required information is provided.  This is called Exception 2 reporting and is described as follows:

Instead of reporting each of your transactions on a separate row of Part I or Part II [Form 8949], you can report them on an attached statement containing all the same information as Parts I and II and in a similar format (ie, description of property, dates of acquisition and disposition, proceeds, basis, adjustment and code(s) and gain or (loss)). Use as many attached statements as you need. Enter the combined totals from all your attached statements on Parts I and II with the appropriate box checked [Box A - C for Part I and Box D - F for Part II].

So if your spreadsheet provides all the required information you simply need to input the totals for each Box on your Schedule D and input code M in the Adjustment Code (col f) on Form 8949 and attach the spreadsheet to your return as a pdf.  Your Form 8949 could possibly only be 1-6 lines if you capture all your trades on the spreadsheet!

Let Us Do It For You ...

If the above concerns you ... let us prepare your Form 8949/Schedule D, Form 4797 or Form 6781  for you!  Click here to get started ...

 
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.  It has evolved into a mechanism where I track every trade and every trade adjustment.

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 on the template and once I exit, determine my return and export the results in a tax return format or, with some column manipulation, into my professional tax software.

Demos/tutorials of the process are on my YouTube channel and accessible from here.

 

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