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certainly3
Level 2

Day trade and tax implication from Wash sale rules

Hello,

 

These days have been great days for the markets, and I have a following question.

 

Today, I executed my day trading, I am wondering tax implications here (for the sake of simplicity, following example would describe today's day trading most accurately. 

 

PYPL 300C 8/20 bought at 10.8, Sold at 11.5, then during mid day push back, I bought it again at 10.7, and then it went down to 10.0, I believe, and I bought it at 10.0 (or maybe I was a little bit lucky to get the least pricing). Then When it hits back to 10.3, I sold back to lock the profits and to give me some buffer zones, and then before today's closing, I sold it back at 12.0

 

So basically, it was

BUY SOLD = net profits

10.8 11.5 = +0.7

10.7 10.3 = -0.4

10.0 12.0 = 2.0

 

My cost basis would be (buy) 10.8+10.7+10.0 = 31.5 and (sold) 11.5 + 10.3 + 12. 0 = 33. 8

so am I going to be taxed on the differential 2.3?

or due to wash sale rules, I would be taxed on 2.7 then?

 

 

Following assumption must be applied

  1. Using RH, so it wont let me select specific lots, but first in and first out

  2. No complicated tax situation just W2 9-5 workers who want some financial freedom in early retirements

  3. All day trading

1 Best answer

Accepted Solutions
Mike9241
Level 15

Day trade and tax implication from Wash sale rules

BUY SOLD = net profits

10.8 11.5 = +0.7

10.7 10.3 = -0.4 since this is a loss and you bought back within 30 days the wash sale rule applies. this loss is not allowed.

10.0 12.0 = 2.0 not to fret, the .4 loss gets added to the 10.0 cost so for tax purposes you have a cost of 10.4 sale price of 12 gain 1.6

this is how RH would report on year-end 1099-B

but you are right in the end since you closed out the position with a gain on the last sale you will report a net profit of 2.3 on the three trades - .7,0,1.6

 

now if you are in the business of trading securities as a business and make the proper election you are not subject to the wash sales rules. so read on if you are interested.

Traders
Special rules apply if you're a trader in securities, in the business of buying and selling securities for your own account. The law considers this to be a business, even though a trader doesn't maintain an inventory and doesn't have customers. To be engaged in business as a trader in securities, you must meet all of the following conditions:

You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
Your activity must be substantial (this usually means a lot of trades each day though there is no specific number); and
You must carry on the activity with continuity and regularity (most days and most of the day while the markets are open).
The following facts and circumstances should be considered in determining if your activity is a securities trading business:

Typical holding periods for securities bought and sold;
The frequency and dollar amount of your trades during the year;
The extent to which you pursue the activity to produce income for a livelihood; and
The amount of time you devote to the activity.
If the nature of your trading activities doesn't qualify as a business, you're considered an investor and not a trader. It doesn't matter whether you call yourself a trader or a day trader, you're an investor. A taxpayer may be a trader in some securities and may hold other securities for investment. The special rules for traders don't apply to those securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day he or she acquires them (for example, by holding them in a separate brokerage account).

Traders report their business expenses on Schedule C. Commissions and other costs of acquiring or disposing of securities aren't deductible but must be used to figure gain or loss upon disposition of the securities. See IRS Topic No. 703, Basis of Assets. Gains and losses from selling securities from being a trader aren't subject to self-employment tax.

The Mark-to-Market Election
Traders can choose to use the mark-to-market rules, investors can't. If a trader doesn't make a valid mark-to-market election under section 475(f), then he or she must treat the gains and losses from sales of securities as capital gains and losses and report the sales on Schedule D and on Form 8949 (for noncovered securities),  When reporting on Schedule D, both the limitations on capital losses and the wash sales rules continue to apply. However, if a trader makes a timely mark-to-market election, then he or she can treat the gains and losses from sales of securities as ordinary gains and losses (except for securities held for investment - see above) that must be reported on Part II of Form 4797. Neither the limitations on capital losses nor the wash sale rules apply to traders using the mark-to-market method of accounting.

A trader must make the mark-to-market election by the original due date (not including extensions) of the tax return for the year prior to the year for which the election becomes effective. You can make the election by attaching a statement either to your unextended income tax return or to a request for an extension of time to file your return. The statement should include the following information:

That you're making an election under section 475(f);
The first tax year for which the election is effective (that is, the tax year for which a timely election is being made); and
The trade or business for which you're making the election.
Refer to the Instructions for Schedule D for more information on how to make the mark-to-market election. It's important to note that late section 475(f) elections aren't allowed.

After making the election to change to the mark-to-market method of accounting, you must change your method of accounting for securities under Revenue Procedure 2019-43, Section 24.01. In addition to making the election, you'll also be required to file Form 3115. Publication 550 PDF describes the procedures for making an election under the section called "Special Rules for Traders in Securities." Non-filing of Form 3115 mentioned above won't invalidate a timely and valid election.

If you've made a valid election under section 475(f), the only way to stop using mark-to-market accounting for securities is to file an automatic request for revocation under Revenue Procedure 2019-43, Section 24.02. Under that revenue procedure, the request for revocation must be filed by the original due date of the return (without regard to extensions) for the taxable year preceding the year of change (the year of change is the first taxable year the revocation is to be effective). This revocation notification statement must be attached to either that return or if applicable, to a request for an extension of time to file that return. Late revocations won't generally be allowed except in unusual and compelling circumstances

 

 

It is too late to make the election for 2020 and 2021. for 2020 it had to be done with the 2019 return (or extension) by 7/15/2020. for 2021 it had to be done with the 2020 return (or extension) by 5/17/2021. if you will be making the 475(f) election for 2022 it has to be done with a timely filed 2021 return (or extension) by 4/15/2022 as of now. 

 

a trader is not required to make the 475(f) election but the trades are treated as capital and wash sale rules apply  

 

 

 

 

View solution in original post

4 Replies
Mike9241
Level 15

Day trade and tax implication from Wash sale rules

BUY SOLD = net profits

10.8 11.5 = +0.7

10.7 10.3 = -0.4 since this is a loss and you bought back within 30 days the wash sale rule applies. this loss is not allowed.

10.0 12.0 = 2.0 not to fret, the .4 loss gets added to the 10.0 cost so for tax purposes you have a cost of 10.4 sale price of 12 gain 1.6

this is how RH would report on year-end 1099-B

but you are right in the end since you closed out the position with a gain on the last sale you will report a net profit of 2.3 on the three trades - .7,0,1.6

 

now if you are in the business of trading securities as a business and make the proper election you are not subject to the wash sales rules. so read on if you are interested.

Traders
Special rules apply if you're a trader in securities, in the business of buying and selling securities for your own account. The law considers this to be a business, even though a trader doesn't maintain an inventory and doesn't have customers. To be engaged in business as a trader in securities, you must meet all of the following conditions:

You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
Your activity must be substantial (this usually means a lot of trades each day though there is no specific number); and
You must carry on the activity with continuity and regularity (most days and most of the day while the markets are open).
The following facts and circumstances should be considered in determining if your activity is a securities trading business:

Typical holding periods for securities bought and sold;
The frequency and dollar amount of your trades during the year;
The extent to which you pursue the activity to produce income for a livelihood; and
The amount of time you devote to the activity.
If the nature of your trading activities doesn't qualify as a business, you're considered an investor and not a trader. It doesn't matter whether you call yourself a trader or a day trader, you're an investor. A taxpayer may be a trader in some securities and may hold other securities for investment. The special rules for traders don't apply to those securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day he or she acquires them (for example, by holding them in a separate brokerage account).

Traders report their business expenses on Schedule C. Commissions and other costs of acquiring or disposing of securities aren't deductible but must be used to figure gain or loss upon disposition of the securities. See IRS Topic No. 703, Basis of Assets. Gains and losses from selling securities from being a trader aren't subject to self-employment tax.

The Mark-to-Market Election
Traders can choose to use the mark-to-market rules, investors can't. If a trader doesn't make a valid mark-to-market election under section 475(f), then he or she must treat the gains and losses from sales of securities as capital gains and losses and report the sales on Schedule D and on Form 8949 (for noncovered securities),  When reporting on Schedule D, both the limitations on capital losses and the wash sales rules continue to apply. However, if a trader makes a timely mark-to-market election, then he or she can treat the gains and losses from sales of securities as ordinary gains and losses (except for securities held for investment - see above) that must be reported on Part II of Form 4797. Neither the limitations on capital losses nor the wash sale rules apply to traders using the mark-to-market method of accounting.

A trader must make the mark-to-market election by the original due date (not including extensions) of the tax return for the year prior to the year for which the election becomes effective. You can make the election by attaching a statement either to your unextended income tax return or to a request for an extension of time to file your return. The statement should include the following information:

That you're making an election under section 475(f);
The first tax year for which the election is effective (that is, the tax year for which a timely election is being made); and
The trade or business for which you're making the election.
Refer to the Instructions for Schedule D for more information on how to make the mark-to-market election. It's important to note that late section 475(f) elections aren't allowed.

After making the election to change to the mark-to-market method of accounting, you must change your method of accounting for securities under Revenue Procedure 2019-43, Section 24.01. In addition to making the election, you'll also be required to file Form 3115. Publication 550 PDF describes the procedures for making an election under the section called "Special Rules for Traders in Securities." Non-filing of Form 3115 mentioned above won't invalidate a timely and valid election.

If you've made a valid election under section 475(f), the only way to stop using mark-to-market accounting for securities is to file an automatic request for revocation under Revenue Procedure 2019-43, Section 24.02. Under that revenue procedure, the request for revocation must be filed by the original due date of the return (without regard to extensions) for the taxable year preceding the year of change (the year of change is the first taxable year the revocation is to be effective). This revocation notification statement must be attached to either that return or if applicable, to a request for an extension of time to file that return. Late revocations won't generally be allowed except in unusual and compelling circumstances

 

 

It is too late to make the election for 2020 and 2021. for 2020 it had to be done with the 2019 return (or extension) by 7/15/2020. for 2021 it had to be done with the 2020 return (or extension) by 5/17/2021. if you will be making the 475(f) election for 2022 it has to be done with a timely filed 2021 return (or extension) by 4/15/2022 as of now. 

 

a trader is not required to make the 475(f) election but the trades are treated as capital and wash sale rules apply  

 

 

 

 

Rick19744
Level 12

Day trade and tax implication from Wash sale rules

I agree with @Mike9241 but want to add some clarification.

Make sure you keep a clean slate at the end of the year and into January.  You can get whipsawed with the wash sale rules with activity that occurs in December and January of the following year.  Just keep track of that 30 day period at the end of the year for all your activity.

*A reminder that posts in a forum such as this do not constitute tax advice.*
certainly3
Level 2

Day trade and tax implication from Wash sale rules

Thank you for the detailed explanation. At this point, I am not a registered trader or anything as I have other professions, but I will keep that in mind as it may progress that way. I did almost 30 day trading in last two days and learned that tax bill could hit back later for. 

 

May I ask you one follow up question?

 

So for the above example, let's just say I bought the same security, PYPL 08/20/21 C at 1200$, and today, I sell at loss at 600$. Then, for all these trades, the total net profit is -3.7 (2.3-600). In this case, do I owe taxes? I am wondering because the wash sale rules may not allow me to deduct the loss (in which case I would still owe taxes on 2.3$ net profits), or I am confused with cost basis. 

 

Thank you so much

fanfare
Level 15

Day trade and tax implication from Wash sale rules

your trades are covered trades.

This means the broker must track your basis, including wash sales and report same to the IRS.

At tax time, file the consolidated 1099-B results your broker send to both you and the IRS.

 

Advice: avoid wash sales, the reporting is painful at tax time since IRS requires all the details of every wash sale..

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