Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : IRS, Tax related strategies--Traders -- Ignore unavailable to you. Want to Upgrade?

To: Colin Cody who wrote (338)	6/17/1998 9:10:00 AM
From: Robert A. Green, CPA	Read Replies (2) \| Respond to of 1383

Excerpt of our Trader Tax Guide about Wash Sale Rules. For the complete guide and/or consultation on trader tax issues go to greencompany.com Wash sale rules do not apply to traders electing mark-to-market accounting method. There is some confusion on the wash sale rule for traders and it is clearly explained in our TRADER TAX RULES & TAX RETURN REPORTING GUIDE Per RIA - 22,719 "Exemption of traders and dealers in securities from wash sale rule. The wash sale rule doesn't apply if the taxpayer is a dealer in stocks or securities and the loss is sustained in a transaction made in the ordinary course of the taxpayer's business of dealing in stocks and securities." Code Sec. 1091(a). Per CCH - "Traders are subject to limitation rules for short sales and wash sales. Although a trader does not maintain an inventory, he is subject to identification rules to determine a basis for the securities sold." There seems to be some contradictory tax research on the wash sale rule. RIA says a trader in securities (like a dealer) is exempt from the wash sale rules. CCH states that traders are subject to the wash sale rules. In Barron's article "Who's a Trader" dated December 8, 1997 it states, "the wash sale rule may plague investors but you, as a trader electing mark-to-market, are exempt-your losses on sales at any time will be fully recognized; and, as noted, even without a sale, so will your paper losses on securities under water at the end of the year." In my professional opinion, the wash sale rules clearly don't apply to traders electing the mark-to-market accounting method. I also believe that the wash sale rules should not apply to traders who do not elect the mark-to-market method as per RIA above. It makes no sense for the wash sale rules to apply to traders who trade the same securities many times within a day let alone a month's time. Wash sales applying to investors but not traders In connection with your stock transactions, it's important for you to be aware of the 'wash sale' rules. Under these rules if you sell stock for a loss and buy it back within the 30-day period before or after the sale date, the loss cannot be claimed for tax purposes. This rule is designed to prevent taxpayers from selling stock to claim the loss while buying it back within a short period of time to retain ownership. Note that the rule applies to a 30-day period before or after the sale date to prevent 'buying the stock back' before it's even sold. Although the loss cannot be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. Thus, it can be claimed when it is finally disposed of other than in a wash sale. Example. Henry buys 500 shares of ABC Corp. for $10,000 and sells them on June 5 for $3,000. On June 30, he buys 500 shares of ABC again for $3,200. Since the stock was 'bought back' within 30 days of sale, the wash sale rules apply. Henry cannot claim his $7,000 loss. His basis in his 'new' 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss. If only a portion of the stock sold is bought back, then only that portion of the loss is disallowed. Thus, in the above example, if Henry had only bought back 300 of the 500 shares (60%), he would be able to claim 40% of the loss on the sale ($2,800 under the facts involved). The remaining $4,200 of loss disallowed under the wash sale rules would be added to Henry's cost of the 300 shares. Note that while wash sale losses cannot be claimed, gains cannot be avoided. That is, if you sell stock for a gain and buy it right back, you must still report the gain -- no special rule applies.