A Stocking Full of Nuggets

Or Maybe Not

If you don't know about the wash/sale rule, you'd better find out in a hurry. This obscure tax code drives traders crazy and gives tax advisers a lot of new customers. The bottom line on the rule: Don't carry a stock into the new year after you've traded it during the old year.

Investorwords.com defines the wash/sale rule as follows: "IRS rule prohibiting a taxpayer from claiming a loss on the sale of an investment if that same investment was purchased within 30 days before or after the sale date." The rule is meant to discourage investors from selling at a loss just to get the tax benefit.

Now you're really confused, aren't you?

This is a case where the definition is more confusing than the concept. It's also a case where I can't help you, because I'm not a tax adviser. Whatever you do, make sure to seek counsel from someone who understands the unique issues facing short-term traders. Many financial advisers misinterpret how the rule applies to short-term trading, and their mistakes will cost you a lot of money.

Let the Software Fix It

Speaking of taxes, how can you organize all those short-term trades into a clean IRS format, without staying up nights writing Excel macros? My favorite solution is TradeLog, a pricey yet powerful software that will automatically dump your broker statements into multiple reporting formats, including IRS Schedule D. TradeLog adjusts easily to mark-to-market traders, as well as part-time hobbyists. Oh, did I mention this outstanding product also calculates wash sales?

What's the Bottom Line?

Finally, I've got a painful exercise for you to perform over the long winter break. Go back through all your trade tickets this year, and calculate how much money you paid in commissions to your broker. It could be quite a shock. For many RealMoney readers, high commissions make the difference between a winning and a losing year. If so, it's time for a change.