Several times last year, I sold stock for a loss and bought it back within 31 days. The wash-sales rule would normally apply to the initial sales, but before the end of the year, I had closed positions on all these stocks. Unless the Internal Revenue Service requires it, I don't see any reason to declare these sales as wash sales and spend time recalculating cost basis on the new shares when I ultimately sold them all before the end of the year anyway.
So my question is, is there any need for me to declare these sales as wash sales on my return? The capital gains/losses numbers come out the same for tax purposes. -- Eric Duvall
As long as you are out of the position for more than 30 days, you do not need to report it as a wash sale, says Gail Winawer, a tax securities partner at
American Express Tax & Business Services
As a refresher, the infamous
wash-sale rule says that if you sell a security at a loss, you must wait at least 30 days before you can buy back that same security, or the tax loss will be disallowed. In that instance, you cannot claim that loss on your tax return.
Of course that loss is not gone forever. The wash-sale rule says that you can add the disallowed loss to the cost basis (or original price) of the repurchased stock. See this previous
column for more on that.
But if you're continually in and out of a position over a period of time, your losses keep getting added to the basis of the repurchased shares. Then you essentially keep passing the losses on down the line until you close out the position. So the net effect is the same in the end.
Just know that it is very important that you are out of the position for 30 days and it does not matter if the sale spans the calendar year, reminds Cameron Routh of
GainsKeeper.com, a Web service that will keep track of your trading activity, including your wash sales, and generate a
Schedule D --
Capital Gains and Losses
Let's assume that last year you were trading in and out of
, constantly selling at a loss. If you then decided to give up and sell your entire position at a loss on Dec. 20, you needed to stay out of the stock for more than 30 days to avoid the wash-sale rule. That meant you had to be out of the position until at least Jan. 19. If so, then you would not have to report all those trades as wash sales.
How Do I Undo the Mark-to-Market Election?
I chose to file "mark-to-market" for tax year 2000. It was a good choice until I started losing money since April. I ended up losing over $300,000 for the year. My question is how can I undo claiming the mark-to-market election? -- Paul Lee
You have touched on a very sticky topic.
Unfortunately, once this election is made, you can't switch back without consent of the IRS commissioner, says Bill Beaulieu, manager of Web tax solutions at GainsKeeper.com. Even worse, you should apply for IRS consent in the year you are requesting the change. So you needed to go through this process before Dec. 31, 2000, if you were not planning on marking to market on your 2000 tax return.
The mark-to-market election is offered to folks who meet the
stringent requirements needed to qualify as a trader for tax purposes. Assuming you have, you then have the option of electing to mark all your trades to market. Traders who make this election must value their securities as if they were sold for fair market value on the last business day of the year. (It's only a paper transaction.)
Because you are required to make this election on your
previous year's tax return, I'm assuming you did so. You now have the luxury of reporting your trades on
-- Profit or Loss from Business
of your 2000 tax return. (The rest of us report our trades on Schedule D.)
But now you are stuck.
"The election, once made, applies to present and future years unless revoked with the consent of the
IRS," says Richard Shapiro, an
Ernst & Young
securities tax partner.
Is it easy to get consent? No. "It's difficult to get a waiver if you still trade on your 1040," says Ted Tesser, trader tax specialist and author of
The Trader's Tax Solution. You have to give the IRS a reason why you want to undo this election. And having too many losses (or gains) is not a good reason.
Even worse, you must apply to revoke this election in the year of the change, says Shapiro. So you're stuck with it for 2000. If you'd like to attempt to get out of this election for 2001, apply now.
Because you are essentially changing the way you account for your trading activity, you need to apply with
-- Application for Change in Accounting Method
. This form indicates that you're changing accounting methods. Be forewarned: It's complicated and will take time and patience.
But if you are giving up on the trading business, you may not have to go through this headache. Because this election is just for your trading activity, it does not apply to your investment activity.
So if the market has beaten you down and you decide to give up trading and get yourself a desk job, just call your broker and open a separate new account. Call it your investment account and flag every new purchase as an investment and put it in that account, says Winawer of American Express Tax & Business Services. She suggests either emailing or faxing your broker written instructions that you intend to use this purchase as an investment. Then save a copy of the fax or email as proof that you no longer actively trade.
Just know that now you have to
like an investor. That means you have to buy and hold (at least for a month!) like the rest of us.
In this instance, you do not even have to apply to have the election revoked for your investments, says Winawer. But know that if you return to life as a trader down the road, you will have to mark your trades to market.
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