Wash sale Help please

Ok here is my situation, I traded stocks for 2 years and I was mostly unaware
of how these differed in terms of tax then straddle trades but i'm coming to
realize that I'm in big trouble. i'm a kid who thought he had a good idea and
here is what happened. I traded butterfly spreads for credit spreads so for
example I bought 40 calls sold 80 of the next higher strike and then bought 40
more calls at the next higher strike netting me 50 bucks or so. I sometimes
would make a little more on the trades after the fact but my gains in 2011 were
about 20k and i lost about 10k in 2012. but in the trades would be huge
amounts. For example i would buy 1m worth of the 40 then sell 2m worth of the
80 calls and then by another million of the 40 calls. so if they all expired
worthless i would have 2m of losses and 2m of gains. well i had wash sales in
january and well from what I gather because of these wash sales I owe somewhere
north of 1m dollars in tax. I make 30k a year and really have no assets at all,
and I
don't even have money to pay a lawyer to try and help me straighten this out.
What am I supposed to do? this doesn't seem right. I was never trying to evade
taxes by selling stock to lock in losses. i never had access to any of the
money i supposedly owe, and I never made or probably will never make enough in
my lifetime to pay these taxes. any advice out there?
Reply to
malona82
In article , wrote:
of how these differed in terms of tax then
who thought he had a good idea and here is
bought 40 calls sold 80 of the next higher
bucks or so. I sometimes would make a little
lost about 10k in 2012. but in the trades
2m worth of the 80 calls and then by another
losses and 2m of gains. well i had wash
somewhere north of 1m dollars in tax. I
What am I supposed to do? this doesn't
losses. i never had access to any of the money
lifetime to pay these taxes. any advice out
I don't understand. Which January?
Wash sales don't permanently increase taxes, only delay the recognition of losses.
I assume you got out of each spread in one day.
A wash sale in January 2012 (because you got back in to something similar within a month) would almost certainly be closed out in 2012 unless the new position was still open in 2013.
Any sale in January 2013 doesn't create tax liability until next year.
If you provide more explicit information it would be possible to provide a more detailed answer.
Seth
Reply to
Seth
unaware of how these differed in terms of tax then
who thought he had a good idea and here is
I bought 40 calls sold 80 of the next higher
bucks or so. I sometimes would make a little
lost about 10k in 2012. but in the trades
2m worth of the 80 calls and then by another
losses and 2m of gains. well i had wash
owe somewhere north of 1m dollars in tax. I
out. What am I supposed to do? this doesn't
losses. i never had access to any of the money
lifetime to pay these taxes. any advice out
I agree the original post is less than clear, but here's a scenario that could cause the type of problem I think the OP encountered.
Assume that in late December, the net realized gains for the year are $1M. Assume that somehow it's possible to realize a $1M loss before the end of the month. As of 12/31/xx the net taxable capital gain is $0. Then in January, a new position is opened that creates a wash sale for the late December loss. Now there is a $1M taxable gain to report on the 20xx tax return. Then there's the other half of the double whammy. When the new position is closed, the deferred loss becomes available, but can only be used to offset current/future gains (that is, gains realized after 12/31/xx), or other income at $3K/year.
It's a stiff price to pay for ignorance about how the tax laws work, but ignorance is never a valid excuse.
Ira Smilovitz
Reply to
ira smilovitz
In article ,
cause the type of problem I think the OP encountered.
Assume that somehow it's possible to realize a $1M
is $0. Then in January, a new position is opened
gain to report on the 20xx tax return. Then
the deferred loss becomes available, but can only
12/31/xx), or other income at $3K/year.
I still don't see how that would work. More likely:
In December, he closes out a trade with a $20,000 profit; one leg has $1MM loss, another has $1.02MM profit. (Yes, there are actually 3 legs, this simplifies to show the key issue.)
In January (less than 30 days later) he opens a new trade with the same underlying instrument. That makes the prior loss a wash sale, so he's stuck with the profit of $1.02MM (and an unrealized loss of $1MM).
I don't know how to resolve this.
Is it possible to change his fiscal year so that the problem doesn't occur during any tax year?
Seth
Reply to
Seth
Assume that somehow it's possible to realize a $1M
is $0. Then in January, a new position is opened
taxable gain to report on the 20xx tax return. Then
the deferred loss becomes available, but can only
12/31/xx), or other income at $3K/year.
Total amateur here, but based on the original post (many trades) the author could be in the business of trading and therefor everything might go onto schedule C. If the business is run on an accrual basis (even cash basis might work depending on how the broker is paid) the gains and losses might be matched in the same tax year.
Jay Wiedwald
Reply to
jay_wiedwald
Are you saying tat in 2012 you had $1M of gains and $1M of losses, but because you bought/sold stock in Jan/2013 the wash sale rule kicked, and your $1M loss was disallowed (although the disallowed loss is carried forward). As a result you have just a huge gain that you have to pay tax on?
Does the 1099-B explicitly say wash sale for some of the sells? That is, is box 5 blank?
As a trader you must be aware of the intricacies of trading, and that means:
(1) Understanding the wash sale rule.
(2) Understand the trader status election. See
formatting link
This lets you ignore the wash sale forsecurities that you trade as a trader, as well the $3000 limit on losses. Butthere are many intricacies, such as whether you trade for a living, etc. It'sanyway too late to take trader status on your 2012 tax return. (3) The Dodd-Frank bill bans certain types of trades that are supposed to be too complex and "undermine" faith in the market. See
formatting link
says that wash trades are grave violations subject to prosecution. Iremember reading an article over a year ago that gave more details about thetypes of trades that are banned but can't seem to remember. BTW, intrade.comshut down because of Dodd-Frank.
Reply to
removeps-groups
To be able to use Schedule C and disregard the wash rule, you must have made an election with the IRS under section 475 in a previous year. See my other post.
Reply to
remove ps
In article ,
Wash trades, in that sense, are bogus trades (trades without market risk). A wash sale isn't.
E.g. if I sell Microsoft stock on April 10th and take a loss on it, then the price goes down so I think it's a good buy so I buy it back on May 5th, that's a wash sale. I have full risk, there's no legality issue (just a tax issue).
On the other hand, if I sell the stock in one account, and simultaneously buy it in another, that's a wash trade with no risk, and is banned. (Although if I make a profit, that's really an arbitrage trade which tends to keep markets in balance.)
Seth
Reply to
Seth
formatting link
> > which says that wash trades are grave violations subject to > > prosecution. I remember reading an article over a year ago that > > gave more details about the types of trades that are banned but > > can't seem to remember. BTW, intrade.com shut down because of > > Dodd-Frank. >
Well the original poster was buying and selling the same stock, or options on the same stock. I have no idea if that constitutes a wash trade.
In any case, selling in one account and buying in another makes no sense. I have no idea why it should be banned at all.
Reply to
remove ps
In article ,
Market manipulation. Doing that increases the apparent volume of trading, and can affect the reported price. (Consider a "pump-and-dump" scheme: someone buys a few million shares of a penny stock, trades it back and forth among different account at increasing prices until a few weeks later the price is up by a factor of 10 and the volume looks respectable, then he gets others to buy based on the apparent trading history.)
Seth
Reply to
Seth
What's banned? If I hold a stock in my cash account and it's above its purchase price, I may decide that I'd like to keep it long term, just not in that account. I sell in the cash account (and the gain is negated by the carried losses from the dot com crash) but buy in in my IRA. Or were you only referring to selling at a loss?
Reply to
JoeTaxpayer
In article ,
I think he was referring to the same situation as the previous paragraph, which you didn't quote, which said that it was a loss. "The other hand" is just the change of the repurchase from being 5 days later to simultaneously, and doing them in different accounts.
Reply to
Barry Margolin
In article ,
If the stock is sufficiently liquid that the sale is filled before you execute the purchase, there's no problem. If it's sufficiently illiquid that the sale is to yourself, it's a disallowed transaction (self-dealing in the IRA).
Seth
Reply to
Seth
snipped-for-privacy@panix.com (Seth) writes:
And of course the easiest way to avoid that is to not place the purchase order until the sell order has finished executing.
Reply to
Rich Carreiro

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