Active-Trader - Taxes for Traders

Welcome back Active Traders.

As you know, I am a big fan if the US Federal Reserve.  However I'm not such a fan of another branch of the US Department of the Treasury and that is the Internal Revenue Service.  And that's because every year at this time I struggle to reconcile all my trading and prepare for filing income taxes.

This year is going to be somewhat different because my accountant has retired for health reasons and I have decided to file the taxes myself using an web site service called TaxAct.  I did some research and Tax Act comes pretty highly rated and very reasonably priced and just behind industry leader TurboTax.

So what makes Tax reporting such a hassle for traders?  Its because for most small investors, they have to report each transaction on either the 1099-B or the 8649 form.  In the past, I put all this on a spreadsheet and reported it to my accountant who dealt with it.  Now that I am doing the taxes myself, I learned a few things in the process.

First is that you can import the trade data directly into Tax Act via a CSV file which are commonly used for data import and export from Microsoft Excel.  Tax Act Specifies the columns required in a specific order along with a code indicating how the transaction should be handled:

A - Short Term with basis reported to the IRS
B - Short Term with basis not reported to IRS
C - Short Term not reported to the IRS at all
D - Long Term with basis reported to the IRS
E - Long Term with basis not reported to the IRS
F - Long Term not reported to the IRS

Back in the bad old days, brokers were not required to report the basis (cost) of positions and it was up to the customer to track and report that information.  The IRS is phasing in new rules where the brokers are required to report the cost basis for trades for which they have the information.  For the 2013 tax year, that includes most equities (stocks) but does not include options.  So for most of my stock trades are category A and most of my options trades are category B.  Constructing a CSV file varies by broker as follows.

E-Trade

For E-Trade, this process is pretty simple, go to Accounts, Gains and Losses, select the Tax Year from the pull-down and click Submit.  From the screen which appears, you can download the data directly to CSV and with a minimum of manipulation get it into the required format.  I would give E-Trade a grade of A on this functionality.

TD Ameritrade / Thinkorswim

For TD, this process is pretty easy and the data can easily be accessed from the www.tdameritrade web site.  For a bonus, TD integrates GainsKeeper accounting software into the web site and you download a fully complete and electronic copy of the 8649 form for input into the software.   Unfortunately, Tax Act only allows one 8649 import per reporting code above.  So instead  you have to import the individual transactions.  This is very easy and the data downloaded into TD Ameritrade can be imported directly into Tax Act with no manipulation required.   Overall, I would give TD a grade of A+ in this area.

TradeStation

TradeStation is another story altogether and here's where it gets ugly. Remember this post Welcome to TradeStation when I was excited about opening a TradeStation account?  I was excited to find that a trade which cost me $10 on E-Trade can be done for $1 on TradeStation.   Of course I knew there would be a downside to using TradeStation.   At the time I didn't know what the downside was but assumed I would find out eventually, and find out I did.

For all the things TradeStation does well, they do a lousy job of financial reporting.  For example, E-Trade can tell me the exact percentage I am up or down for the year.  They can tell me  realized gains and losses for the year to the penny and at any time and export it to CSV.  No such luck with TradeStation.

Instead, TradeStation takes almost an arms-length relationship between your trades and their reporting on them.   Here are the specifics of what TradeStation does and does not do:

- They report opening and end-of day balances on a current and historical basis

- They allow detailed downloading of raw trade data in 6-month intervals

- No reporting of Year to Date Profit or Loss

- No download of the 8649 or any attempt to pair opening trades and closing trades

As of this writing, TradeStation missed the statutory deadline to deliver the 1099B data.  They indicate on their web site that per the law they have asked for a 30-day extension and that they are working with their vendor to deliver the data by 3/18/2014.

Now this past part concerns me just a little bit.  TradeStation depends on a vendor to provide this information?  They clearly are a technology-based organization and I am a little concerned that they can't produce this data from their own servers and systems.

Anyway, that data that they provide can be imported into trader's accounting software such as TradeLog (from Green Trader Tax) or GainsKeeper.  GainsKeeper provides this service on a per-year basis based on the number of trades as follows:

- Investor - Maximum of 150 trades - $69
- Trader 1000 - Maximum of 1000 trades - $179
- Trader 3000 - Maximim of 3000 trades - $379
- Trader 5000 - Maximum of 5000 trades - $499
- Trader Elite - Maximum of 20,000 trades - $659

So in my case, the worst case scenario is I have to pay $179 to resolve the trades from TradeStation and convert them into a format which can be imported into TaxAct.

It would probably be a better exercise for me to create the spreadsheet myself each weekend as I progress through the tax year.  This would also provide a good opportunity to review the prior week's trades for lessons learned.

Is there any relief from these onerous requirements to report each transaction to the IRS?

There is an election under section 475f called Trader Mark to Market status.   If your trades meet certain criteria and you make this election early enough in the Tax year, you are allowed to report a single net gain/loss figure for your trading and pay taxes based on that.   Also, once you make this election you are exempt from disallowing losses on Wash Sales.  This election and subsequent judgements by the IRS in terms of whether traders qualify for this election or not are the subject of entire blogs and best followed on Green Trader Tax.

Get those taxes ready and have a great week ahead.