Wash sale Help please

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

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

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

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

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

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

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

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

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

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

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.

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

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.

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

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?

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.

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

And of course the easiest way to avoid that is to not place the purchase order until the sell order has finished executing.