by David N. Eich - originally published February 8, 2006
The IRS has made it clear that all traders and investors of securities must
report the details of their trading capital gains or losses line by line on the
IRS schedule d. So if you have more than five trades, then the rest get reported
on as many schedule d-1's as necessary.
What this means for the average active trader is that many hundreds, if not
thousands, of stock and option purchases and sales need to be properly matched,
and a subsequent profit or loss calculated. In addition, any wash sale
adjustments need to be made and these must also be properly recorded on schedule
d.
How can any mortal trader accomplish this monumental task without pulling
their hair out? Certainly not without some sort of automated trade accounting or
tax software program.
But wait! Don't many online brokers support personal finance programs such as MS
Money® or Quicken®?
Yes, unfortunately they do. But what most traders do not realize is that these
programs are quite useless for tax purposes because in many cases they
do not properly match your trades, especially when short sales are concerned and
they do not calculate wash sales.
Online brokers also commonly support tax software programs such as Turbo Tax®
and Tax Cut®. But these also do not calculate wash sales. While they purport to
have some capability to flag wash trades, and thereby generate a wash sale
adjustment, it requires you to meticulously mark each wash trade manually, and
you can olnly do so for equal numbers of shares. They leave it up to you to
apply the wash sale rule yourself.
Well if that sounds difficult enough, then imagine going through a few hundred
trades and trying to decide which need to be flagged as a wash sale and which do
not.
Now, what if the wash trade was triggered by a trade with an unequal
number of shares? With the tax programs mentioned above, you are simply
out of luck!
Example: You bought and sold 1000 shares of MSFT at a $500 loss and you then
bought back 300 shares of MSFT within the 30 day wash sale rule window. Then you
bought back another 200 shares on another date, and 150 shares on yet another
date. The original loss of $500 needs to be apportioned among these three trades
and a small portion of the $500 loss is not affected by any wash sales.
The same holds true for many of the inexpensive or free wash sale / schedule d
software programs available on the Internet. They simply don't have the muscle
needed for this complex tax rule and most admit that they are not IRS compliant.
Some other common schedule d software deficiencies are the inability to
calculate wash sales:
• between short and long trades
• between stocks and options
• across multiple accounts
So if you are shopping for a trader tax software solution, please make sure that
all your bases are covered. Since the IRS seems to be cracking down on schedule
d reporting, you certainly don't want to take any chances with your tax return.
David Eich, Author
TradeLog™ trade accounting and tax software
www.armencomp.com