Trading's Tricky Tax Issues

But if you do have open positions on Dec. 31, the gross proceeds reported on your Form 1099-B -- Proceeds from Broker and Barter Exchange Transactions will be greater than the amount you report on your tax return.

You'll need to attach a reconciliation schedule. It can be a plain sheet of paper with your name and Social Security number on it. Write "see attached schedule" in column (a), then attach a form that should look something like this:

Gross proceeds from Broker ....xxxx

Less short sales to be reported next year ....yyyy

Total reported on Schedule D ....zzzz

The final number should be the total sales in column (d) on Schedule D.

Option Options

The sale and purchase of calls and puts are reported just like those of stocks. Everything goes on Schedule D. Just don't forget to subtract commission fees from the sales price and add them to your original cost.

Option trades are not reported on your Form 1099-B (I know, it's nutty). Still, these trades must be reported on your tax return, so you'll need to do a simple reconciliation, otherwise the amount you report on your Schedule D will not match the amount on your 1099s.

If the total sales price you're reporting on your tax return is larger than the amount reported on your 1099-B -- Proceeds from Broker and Barter Exchange Transactions, you're probably not going to have a problem. If that's the case, you're paying more tax than the Internal Revenue Service belives you should, and I doubt Uncle Sam will argue about that.

But if the amount you report is less than what is on your 1099-B (i.e., you're a really bad options trader), attach a simple schedule explaining the difference. Be sure to put your name and Social Security number on it. Then show the difference as a lump sum. Say you're down $2,000. Just show that $2,000 as a "difference due to option trading losses." There's no need to show every transaction. You'll just confuse the IRS.

Remember, if all you do is trade options, you won't get a Form 1099-B at all. So, again, just attach a quick explanation of your total sales proceeds (i.e., "sales from options trading").

And on a final note: In general, if you keep a detailed trading schedule throughout the year or use a service like Gainskeeper.com, you can just attach that detail. As long as it contains the same info as Schedule D, just transfer the grand totals to Schedule D and write "see attached schedule" in the description column. Just write "various" in the date columns.

So while active trading may give you a rush throughout the year, it's pretty sure to give you a splitting headache come tax time. So pour a cup of coffee, take your time and just deal with the minutiae.