Same Situation: The 50$ loss of Lot A sale is added as cost in the final price of lot B or lot C thus reduce gains from 150 to 100$. Is this correct understanding?
Which rule will be best to manage this FIFO or LIFO?
if you don't properly elect IRC code sec 475(f) being a day trader has no meaning for wash sale purposes. (the election must be file by the original due date of the previous year return. so if you didn't properly elect on your 2019 return or extension which had to be filed on or before 7/15/2020 you are out of luck for 2020. (for 2021 the election and form 3115 have to be filed by 4/15/2021) a proper election allows you to ignore wash sales because at the end of the tax year you adjust for any unrealized gains or losses - securities held are revalued to their closing price and that gain or loss is picked up as income in that year. trades are reported on form 4797 not schedule D. see a pro because just because the IRS does have criteria it would use if you were audited. form 3315 also has to be filed because you are changing accounting methods for valuing your inventory.
since it's likely you didn't make an election effective with 2020 unless you tell your broker otherwise they will use the fifo method. that is how they'll report it to the IRS. if you want to use a specific block against the sale you have to inform your broker in advance. some brokers will accept standing instructions to use lifo
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Lucky for you the broker is required to track and detail all your wash sales.
Unlucky for you all wash sales involve an adjustment and adjusted transactions have to be itemized on Form 8949.
At tax time, you have the option to summarize your transactions by Sales Category.
IRS requires details to be listed on own Form 8949,
or on your other forms (e.g. consolidated 1099-B) which have the same information and in the same manner as Form 8949.
Either way, if you choose to summarize, you have to mail the transaction details to the IRS within three business days of IRS accepting your e-Filed tax return.(unless you have attached a PDF of the transactions details to your e-Filed return. TurboTax does not offer this feature).
Exception: if you summarize Category A or Category D, Form 8949 is not needed for transactions without adjustments. No mailing is necessary.
As an active investor, be aware that your category Box A sales without adjustments do not require Form 8949, so there is no reason to import or key in those transactions.
Instead use the "enter a summary" option to put your numbers on Schedule D Line 1a.
If you have wash sales, it gets more complicated since those adjusted transactions have to be itemized on Form 8949 and the summary totals adjusted accordingly.
Enter the wash sales on Form 8949, then use the subtotal results on the bottom of that form to know how much to subtract. Be sure to NOT check the adjustments box in the summary window.
Alternatively, if entry of Wash Sales is too tedious,
summarize and check the box for adjustments and enter the disallowed amount.
This summary will go on Schedule D Line 1b.
You will be making the mail-in election.
here's what you are facing to make an election to be treated as a trader rather than an investor.
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; and
You must carry on the activity with continuity and regularity.
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 (Form 1040 or 1040-SR), Profit or Loss From Business (Sole Proprietorship) PDF. 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 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 (Form 1040 or 1040-SR), Capital Gains and Losses PDF and on Form 8949, Sales and Other Dispositions of Capital Assets PDF as appropriate. 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, Sales of Business Property PDF. 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 income tax return if filed without an extension 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 (Form 1040 or 1040-SR), Capital Gains and Losses PDF for more information on how to make the mark-to-market election. It's important to note that in general, 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 PDF, Section 24.01. In addition to making the election, you'll also be required to file a Form 3115, Application for Change in Accounting Method PDF. Publication 550 PDF describes the procedures for making an election under the section called "Special Rules for Traders in Securities." Non-filing of the 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 extension of time to file that return. Late revocations won't generally be allowed except in unusual and compelling circumstances
if you are making the 475(f) election for 2021 it had to be filed with a timely filed 2019 return (7/15/2020) or a timely filed extension for that year
for 2022 the election must be filed by 4/15/2021 or with a timely filed election for that year.
a trader is not required to make the 475(f) election but the trades are treated as capital and wash sale rules apply
It seems as per the attached table in your answer, my calculations were correct (based on FIFO rules). I am still working on understanding this in greater detail, so I can make better decision with FIFO or LIFO + manage my account better.
Lot of good and relevant information. Thanks for adding to the string of great resource on my original question.
Although I will have more Questions later, but I will need to dig deeper in what you already told me n understand it better 1st at my end. Regards one of the information you shared:
“If you are making the 475(f) election for 2021 it had to be filed with a timely filed 2019 return (7/15/2020) or a timely filed extension for that year
for 2022 the election must be filed by 4/15/2021 or with a timely filed election for that year.”
I only started trading with increasing intensity in second half of 2020, with few wash sales. But 2021 will most likely have much greater bunch of day trades or short term trades (not focusing on dividends etc).
I filed my 2019 tax in March 2020 (there I had zero trades, I had no idea at that time that I will end up trading so heavily in 2020 and 2021).
2020 taxes will be filed again in coming March. So, based on what you explained, I can not claim 2020 or 2021 day trader exclusion (no wash sale rules) unless I had initiated that process in 2019 tax filing?
as a "professional trader ", you are making short term trades and getting in and out often.
therefor, considerations of FIFO, LIFO are irrelevant.
a "professional trader" has to keep long term investments, if any, segregated in a separate account for that purpose. That account doesn't get MTM treatment.
I think your overthinking what's happening.