Broker Provided Gain/Loss ReportsLet's take a look at the misconception that "all you need is your broker provided Gains and Losses report" (or profit and loss) statement. The first problem with this approach is that these statements are notoriously wrong. So what are we to make of such broker provided Gain/Loss statements? Please let me illustrate some of the problems: A real life example:A certain trader made approximately 80 round trip trades in 2007. The last page of his broker provided Gain/Loss report showed a net loss of $1,909.87
The same trader imported from his brokerage account into TradeLog after manually entering his 2 positions carried open from 2006. He was able to see each and every trade that he made throughout the year in the exact order that he traded them, verified his open positions at year end and reconciled to his 1099 to the penny. TradeLog also properly calculated his wash sales and no losses were disallowed for 2007 and deferred to 2008. TradeLog calculated a net gain of $3,392.01. Why the difference? One mistake that was easy to spot was for Altria Group (MO) where he held 257 shares open from 12/15/2006 and where his broker G/L statement did not pick up this open position:
If you look at the above section of this report, there is no indication that anything was missing and the 200 share purchase from 02/26/2007 seems to match quite well with the sale on 03/01/2007. But since he had 257 shares open from last year, the first sale in 2007 dated 03/01/2007 needs to use the open position cost basis of 200 of these shares for calculating it's gain or loss. The cost basis on the balance of the 57 shares is used as part of the cost basis of the very next sale of 357 shares made on 04/09/2007. This was easy for us to spot because we have been doing this for 8 years. We also compared that with what TradeLog recorded:
This now results in the following correct entries on schedule d:
When open positions are missing from the G/L statement it throws off the trade matching for the entire gain and loss report. Everything needs to be shifted due to the IRS first-in, first-out (FIFO) trade matching rules. But the real problem is that there is NO WAY for this trader to know that something was wrong by just looking at his statement! He was given a false sense of security when he depended on his broker to provide an accurate report of his trading gains and losses. Miscalculated Wash Sales This particular broker Gain/Loss statement is quite unique however, in that they made an attempt to calculate wash sales. Most brokers do not calculate wash sales in their Gain/Loss reports which is an IRS requirement. But if they did, as we can see from this example, it only compounds the problem. In addition, if you had more than one brokerage account, wash sale calculations may be further in error because wash sales must be calculated across all brokerage accounts. Are you starting to see how easy it can be to misrepresent your true capital gain or loss from trading? Now what if you use one of the popular tax software programs? Does this
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Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Armen Computing Ltd. makes no investment recommendations and does not provide financial, tax or legal advice. Please consult your tax advisor or accountant to discuss your specific situation. You are solely responsible for your investment and tax reporting decisions, and you should carefully evaluate all information delivered to you by Armen Computing Ltd. and TradeLog. Not all information may be appropriate for all investors. |
