Tax questions, implications and strategies

[Jonathan Hewitt]

OK, I am having some tax difficulties. I understand that a wash sale is one "that occurs when an individual sells or trades a security at a loss, and within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so."

My problem is that it seems to appear that my 1099-B from my brokerage considers "substantially identical" to mean the EXACT SAME stock or the EXACT SAME option. I could be reading it wrong as it gave me quite the headache trying to follow all the trades but that's what it looks like.

Based on this, it looks like my options are to (1) submit what my brokerage gave me in regards to the way they considered a wash sale and potentially get in trouble or (2) spend a full weekend to go through my trade activity of several hundred trades and manually determine cost basis on each one and get flagged for submitting a difference from that my brokerage gave me and then get in trouble for making a mistake somewhere along the line.

And I guess there is always option (3), hire a tax preparer so that way he/she is on the line if I get audited but that's pretty expensive and I've already done my taxes with the exception of my trades.

Is my brokerage messed up or is this common for other brokerages? What do you guys do? I've heard it can be several hundred dollars to have someone do your taxes for even a basic preparation and that's a lot of money for me so I'd rather not go that option if possible. Thanks in advance.

 

[kcveins]

OK, I am having some tax difficulties. I understand that a wash sale is one "that occurs when an individual sells or trades a security at a loss, and within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so."

My problem is that it seems to appear that my 1099-B from my brokerage considers "substantially identical" to mean the EXACT SAME stock or the EXACT SAME option. I could be reading it wrong as it gave me quite the headache trying to follow all the trades but that's what it looks like.

Based on this, it looks like my options are to (1) submit what my brokerage gave me in regards to the way they considered a wash sale and potentially get in trouble or (2) spend a full weekend to go through my trade activity of several hundred trades and manually determine cost basis on each one and get flagged for submitting a difference from that my brokerage gave me and then get in trouble for making a mistake somewhere along the line.

And I guess there is always option (3), hire a tax preparer so that way he/she is on the line if I get audited but that's pretty expensive and I've already done my taxes with the exception of my trades.

Is my brokerage messed up or is this common for other brokerages? What do you guys do? I've heard it can be several hundred dollars to have someone do your taxes for even a basic preparation and that's a lot of money for me so I'd rather not go that option if possible. Thanks in advance.

This is actually pretty common; the thing to remember is that even though you may have a wash sale, you are not really losing out on much, as the cost basis gets adjusted. The best thing to do is to follow your option 1. Everything will balance out in the end. Tax software (I use Turbo Tax) is also easy to use - just download the info from your broker.

 

[mershaw2001]

Submit the form the broker gave you. I have accidentally held the same position in two different brokerages in my first year of trading. When I sold and bought and sold etc, I should have actually done the funky math to make the two brokerages align and have wash sales on 500 shares of a 2 dollar stock. The two brokerages don't communicate, so they didn't know that i had those sales, but frankly it's not worth it to try to do that reconciliation. The difference the gov would get is minimal iand they didn't say anything about it.

 

[Jonathan Hewitt]

Thanks for your responses!

 

[Robert.Boston]

With all the usual disclaimers ("I am not a lawyer, accountant, etc. and your decisions are your own"), I agree with reporting what your brokerage gave you. Any deviation from that is likely to attract an audit, which is the worst of all outcomes even if you have meticulous support for each and every number on your tax return. Why ask for trouble?

 

[sleepyhead]

I got my Schwab tax statement for 6 months worth of trading and it is 78 pages long!

The right thing to do would be to check over every transaction and make sure that you are reporting the wash sale rule properly. You can pay a CPA firm thousands of dollars to do that (if you have as many trades as I do) and then for a few thousand dollars more cross reference all of those trades against your trades in a different trading account. And then for good measure you can pay a few thousand dollars more to cross reference all trades against your 401k accounts and other retirement accounts. Only to find out that you might owe the government a couple extra dollars.

You can do all that or rely on the statement that your broker sent you.

It is up to you what to do. If you choose the former then my wife and I (we run our own CPA practice from home) will gladly take thousands of dollars off your hands to find out if the wash sale rule was applied properly.

On second thought, I don't know if I would want to do all of those calculations even for thousands of dollars.

It is a really dumb rule and has to go...

 

[Jonathan Hewitt]

On second thought, I don't know if I would want to do all of those calculations even for thousands of dollars.

Yeah, I'd rather give you several thousand dollars to invest for me! I'm glad I'm not the only one who thinks that law is outdated and dumb.

 

[kenliles]

Agree with above responses. Similar to sleepy I get 40-80 page trade docs from broker who computes wash etc. By a long shot your best bet is to use those results exactly, then use Turbo Tax to automatically input, and consider purchasing (it's very cheap) the TTax representation insurance for any audit.

 

[sleepyhead]

Yeah, I'd rather give you several thousand dollars to invest for me! I'm glad I'm not the only one who thinks that law is outdated and dumb.

When I worked on Wall St. it was my dream to start my own hedge fund and grow it big like David Einhorn did (he started his hedge fund with $900k).

I might consider doing it one day, I imagine that the regulations around it are too prohibitive nowadays. Plus I think that you have to pay something in the order of $50k to register a hedge fund. I will look into the regulations one day.

The only reason that I wouldn't start a fund now is because we are going into our 6th year of this bull market and there might not be but another 1-2 years before the run ends. I would not want to raise money now only to lose it for my clients. The catch 22 situation here is that I would love to start a fund at the bottom of a bear market, but by then no one has any disposable cash to invest in such a fund. It really is a lose-lose situation.

I only invest in solar and TSLA nowadays and I believe that I know how to make money in these two sectors as long as there is a continuation of the bull market. If the market turns south then these two sectors will get hit the hardest. I do not diversify, because that is a risk that I am not willing to take since i do not have any more time to study other industries.

I know of a guy who ran a hedge fund with 100% of funds invested in one company. If I ran a hedge fund, then my strategies and risk profile could be similar to that. If I invested other peoples' money then I would have to set a limit of no more than 3%-5% of their investment portfolio invested in my fund.

I would love to do it, but the regulation might be impossible to get around (accredited investor status, etc.).

 

[ckessel]

Just an FYI, I had penalties owed due to not paying estimated taxes on my TSLA sales in 2013. I'd somehow had the impression that since I could have offsetting losses as the year went on that it wasn't a problem to just pay it all on April 15th when the books were worked out.

On the other hand, the penalties were fairly small.

 

[hcsharp]

And I guess there is always option (3), hire a tax preparer so that way he/she is on the line if I get audited but that's pretty expensive and I've already done my taxes with the exception of my trades.

Hiring a tax preparer will not put them on the line and make you innocent. Not at all. You will either have to pay them to sort out the wash sales or do it yourself and provide them with the correct info. The only [small] problem with option 1 (report according to the 1099-B when you know it's wrong) is technically it's tax fraud if over a certain percentage of your income. Having said that, unless the amount of tax is a lot, the chances they would charge you with fraud is about the same as your chances of getting hit by a meteor this week. That's true even if you get caught, and you almost certainly won't. As somebody who is licensed to represent taxpayers before the IRS, I can tell you that almost every tax preparer would report what was on the 1099-B and pretend they didn't notice the other wash sale trades unless you told them.

The IRS is well aware that those brokerage statements are frequently wrong. Aside from common mistakes, there are a host of other reasons why your basis might be different than what is reported. That's why they have a provision to provide a different basis. You just have to enter a code on the Form 8949 columns f and g. In other words, it's not uncommon and won't by itself raise any flags.

There is another option. You can point out the incorrectly reported transactions to the brokerage and ask them to provide you with a corrected 1099. Again, unless it's a lot of money, is it worth it?

Because I'm licensed, I can't advise you to choose option 1, but...

Life is short. Go out and live it.

 

[772]

Taxes are another reason why most of my trading is in futures now... no need to report individual trades (and favorable tax rates on profits). Filling out tax forms is a pita... just thinking about my tax return from 2 years ago makes me go into the fetal position :crying:

 

[Robert.Boston]

Likewise, I do all my short-term trading in a tax-deferred account. Possibly not the most advantageous from a lifetime tax perspective, but it has the singular merit of keeping my income tax preparation simple(r).

 

[anon]

I have noticed discussion of wash sales on here, but I haven't seen any discussion of straddles. I have just been reading that protective puts and even some covered calls are treated as straddles for tax purposes, so the loss is deferred until the underlying stock is sold.

2013 was my first year trading options, so I'm new to this. Can anybody recommend any software to sort out this kind of transaction automatically? I have been thinking of trying Tradelog, but I'm not sure if it will do this or not.

Many thanks for any advice.

 

[TSLAopt]

A lot of us are going to have to deal with tax issues when we report our 2013 taxes considering the dramatic rise in TSLA's stock price (and options).

So I'm starting a thread for us to share questions, insights and advice regarding tax implications. This is for those who already have stock/option gains and also for those who are considering purchasing new stock/options and have questions.


Disclaimer: I know probably none of us are accountants (maybe there might be a few) and we're from different countries. So, this thread isn't for strict, accountable advice. Rather it's more a preliminary stage to field questions. Before making a major financial/investment decision, make sure to consult your accountant because each person's situation can be different.

so I had my accountant do my taxes and turns out I owe a large sum of money...primarily from selling some of my LEAPs at the end of 2013 for massive gains. Unfortunately I only have about half of the cash on hand that I actually need to pay off my 2013 taxes by April 15th as of right now.

The rest of my liquid equity is fully vested in some exercised TSLA shares from my shorter term Sept 2013 options that expired deep ITM and 2016 LEAPs that have big gains already. I don't want to sell these anytime soon as I'd have to pay much higher tax rates on short term gains than if I wait until the end of the this year.

I've asked my accountant to see if its possible for me to pay the IRS in installments over the rest of this year instead of all on April 15th...that is my first option.

my other options are the following:

a)can transfer my account to another broker that offers margining on TSLA stock and borrow cash on margin to pay the rest of my taxes? Would only need to leverage a tiny bit to maybe 1.1:1 to do this My current broker(IB) doesn't allow any margining at all on any stocks that are up over 100% in the past year which include my only stock holdings! Lucky me I guess.


b)if I can get granted the IRS extension then start selling deep OTM calls to generate extra cash to pay off my taxes over the installment plan.
My worry here is that if the stock crushes it and goes up another 100% within a 2-3 month period I could get screwed out of much of these gains.

c)transfer to the other broker and use margin to sell puts or put spreads to generate cash



anyone else have any other creative ideas?

Side note: i now also have a very large IRA from enormous gains in TSLA stock/options, but can I borrow against that somehow to pay taxes? I don't think so
(I already borrowed against my 401k a couple years ago to help put a down payment on my house so can't do that one again)

 

[Beavis]

My income is earned unevenly throughout the year. It makes cash management a little bit of a pain. This isn't necessarily creative but I manage my quarterly tax payments / cash flow by borrowing against the CSV of my whole life policy. When I get paid, I pay back the loan. It's easy and keeps me from jacking around with my investments and causing unwanted tax consequences.

 

[TSLAopt]

My income is earned unevenly throughout the year. It makes cash management a little bit of a pain. This isn't necessarily creative but I manage my quarterly tax payments / cash flow by borrowing against the CSV of my whole life policy. When I get paid, I pay back the loan. It's easy and keeps me from jacking around with my investments and causing unwanted tax consequences.

Interesting, I don't have whole life insurance but this would be an interesting idea for people who do

 

[hcsharp]

so I had my accountant do my taxes and turns out I owe a large sum of money...primarily from selling some of my LEAPs at the end of 2013 for massive gains. Unfortunately I only have about half of the cash on hand that I actually need to pay off my 2013 taxes by April 15th as of right now...

Like almost every tax question in the world, the answer is "It Depends!" You have lots of options. The best solution depends on your situation. The biggest question is when will be able to pay the tax? Or should I say when will some of your gains be long term and then qualify for much lower tax rates next year? Warning: this advice won't work for everybody. Be sure to check with your tax adviser before implementing any plan.

1) you can usually get an installment plan from the IRS. There's a fee to apply and the interest rate is probably slightly lower than margin interest rates at most brokerages. Generally you have to be current on your 2014 estimated taxes, which will probably compound the problem you're in, and you can't make a late payment or they can call in the loan and start collections. The interest on underpayment of estimated tax is much lower, and you generally have to pay that first, so the effective interest rate on the installment plan is higher than it looks.

2) You can borrow from your IRA up to 60 days without tax consequences. This has limitations. Don't do it more than once a year for example.

3) Do you have any equity in your home?

4) Again, how soon will be able to pay what you owe? One option is to file April 15 and pay what you can with the return. They will start collections but usually won't get too aggressive as long as you keep whittling away at the debt every time they send you a new bill. This usually works if you can pay it off in a few months. Interest rate on underpayment is 0.5% per month after Apr 15 plus about 4% /yr.

5) File an extension. Be sure to disclose what you owe on the extension, and pay as much as you can. They won't start collections at all until you actually file the return which won't be due until Oct 15. Interest rate is similar to option 4 above.

6) Do you already have a car loan on your MS? If not, get one. Auto loan interest rates are shockingly low.

7) Other options are available but don't know what will work without more specific info about your situation.

 

[TSLAopt]

Like almost every tax question in the world, the answer is "It Depends!" You have lots of options. The best solution depends on your situation. The biggest question is when will be able to pay the tax? Or should I say when will some of your gains be long term and then qualify for much lower tax rates next year? Warning: this advice won't work for everybody. Be sure to check with your tax adviser before implementing any plan.

1) you can usually get an installment plan from the IRS. There's a fee to apply and the interest rate is probably slightly lower than margin interest rates at most brokerages. Generally you have to be current on your 2014 estimated taxes, which will probably compound the problem you're in, and you can't make a late payment or they can call in the loan and start collections. The interest on underpayment of estimated tax is much lower, and you generally have to pay that first, so the effective interest rate on the installment plan is higher than it looks.

2) You can borrow from your IRA up to 60 days without tax consequences. This has limitations. Don't do it more than once a year for example.

3) Do you have any equity in your home?

4) Again, how soon will be able to pay what you owe? One option is to file April 15 and pay what you can with the return. They will start collections but usually won't get too aggressive as long as you keep whittling away at the debt every time they send you a new bill. This usually works if you can pay it off in a few months. Interest rate on underpayment is 0.5% per month after Apr 15 plus about 4% /yr.

5) File an extension. Be sure to disclose what you owe on the extension, and pay as much as you can. They won't start collections at all until you actually file the return which won't be due until Oct 15. Interest rate is similar to option 4 above.

6) Do you already have a car loan on your MS? If not, get one. Auto loan interest rates are shockingly low.

7) Other options are available but don't know what will work without more specific info about your situation.

thanks HCSharp...one quick question...if I own a 145 Jan 2015 LEAP call option I bought in July of last year for $20 and right now decide to sell 250 Jan 2015 calls against it for $50 then:
a)I assume the initial $50 is taxed as income
but
b)if the stock ends up being 295 on December 29th this year and I close both LEAPs out then at the same time:
1)I really only pay short term tax (ie. income tax) on approximately $5 if I bought back the 250 LEAP at $45 on Dec 29th
2)and I would pay long term gains taxes on $130 if I sell the 145 LEAP at 150 (295 - 145strike - $20 cost basis)


in my hypothetical scenario, Is this all correct to your best judgement?
I know I need to consult a tax advisor as well to confirm but just wanted your opinion or anyone else who is experienced with taxes and options

 

[anon]

thanks HCSharp...one quick question...if I own a 145 Jan 2015 LEAP call option I bought in July of last year for $20 and right now decide to sell 250 Jan 2015 calls against it for $50 then:
a)I assume the initial $50 is taxed as income
but
b)if the stock ends up being 295 on December 29th this year and I close both LEAPs out then at the same time:
1)I really only pay short term tax (ie. income tax) on approximately $5 if I bought back the 250 LEAP at $45 on Dec 29th
2)and I would pay long term gains taxes on $130 if I sell the 145 LEAP at 150 (295 - 145strike - $20 cost basis)


in my hypothetical scenario, Is this all correct to your best judgement?
I know I need to consult a tax advisor as well to confirm but just wanted your opinion or anyone else who is experienced with taxes and options

Unfortunately, I think this is not correct. By selling calls against LEAPS, you are entering into a straddle position; note that the IRS regulations on straddles are very broad and encompass almost any situation in which one position is offset against another. By entering into a straddle while you are still in the short-term period for the existing LEAPS, you would be resetting their holding period and they would be classified as short-term gain if sold by the end of the year (or within one year from buying back the LEAPS that you are thinking of selling).

Note that it would be possible to get around that by selling the calls against stock and not LEAPS - then you could sell so-called qualified covered calls, but there are restrictions on those, including when they can expire (at least 30 days, but no more than one year). You could alternatively form an `identified straddle' with other positions that you are thinking of holding for the longer term, but you should look at the regulations and requirements for that in advance. In particular, one requirement is that an identified straddle must be clearly noted in your records on the day that you establish it.

Update: I should also mention that a straddle comes with additional tax reporting obligations requiring some of the transactions to be reported on form 6781 instead of the usual 8949. If you do any other Tesla trades near the same time, trying to coordinate the straddle rules and wash sales rules can turn into a nightmare, as I have recently discovered...