EDUCATION CENTER
GTT RESOURCES: WASH SALE

Wash Sale Loss-Deferral Rules

Qualifying traders who elect mark-to-market (MTM) accounting treatment are exempt from the "wash sale" loss-deferral tax laws. Otherwise, traders and investors using the default "cash method" of accounting are subject to the wash sale loss-deferral rules (see below).

Here is the IRS Web site page on Wash Sales.

GTT Commentary
Wash sale rules are complex and very confusing for active traders. We believe that the IRS will eventually exempt all qualified traders from wash sale loss rules because application of these rules is very difficult and places too much of a burden on traders and IRS examiners. To calculate wash sales manually for active traders could take 100 hours of work or more.

Wash sales can improve your tax results
If you are stuck with excess capital loss carryovers for 2003, consider that wash sale losses may be better tax-wise then capital loss carryovers. 2003 wash sale losses can be converted to 2004 "ordinary losses", if you elect mark-to-market accounting (MTM), whereas capital loss carryovers may remain unutilized capital loss carryovers in 2004. Green covered this topic in full in his December 2002 article for Active Trader magazine.

The best way to calculate your wash sale losses is with our GTT TradeLog or TradeLog trade accounting software programs. Click here to learn about the programs and buy them online.

GTT TradeLog is a good solution for wash sales
If you are stuck with the cash method of accounting for 2003 (i.e., you missed the MTM election on April 15, 2003) and you have many wash sale losses (or think you may have many), we highly recommend that you purchase/download our GTT TradeLog software program. The program will allow you to easily download (or import) all your trades (unlimited) into your GTT TradeLog data file (one per brokerage account). Next, our program will automatically identity all your wash sale losses. Finally, our program will make the necessary wash sale loss deferral adjustments to 2003. No other program on the market can handle wash sale loss adjustments for a huge volume of trading activity like GTT TradeLog can. For more information on how GTT TradeLog handles wash sales, visit our GTT TradeLog Web site page on wash sales by clicking here.

Note: Wash sales are extremely complex and there are many situations that add nuance and need interpretation from a trader tax expert. Even with our GTT TradeLog program, we recommend that you consult with GTT about your wash sale loss adjustments.

A recommendation
Elect MTM for 2004 and get out of the wash sale loss headache scenario for 2004.
When you change your accounting method to MTM, GTT TradeLog will also calculate your Section 481 adjustment as of Jan. 1, 2004 (the date required). It pays to use GTT TradeLog for 2003 to make your 2003 wash sale loss adjustments and your 2004 MTM Section 481 adjustment.

An example of wash sale headaches for an active trader:
Consider the case of an active trader that traded stock XYZ every day, all day, for many years.

A trader had a loss on the first trading day in stock XYZ and continued to buy back XYZ every day (within the 30-day wash sale loss period) and trade it at a loss. That trader needs to calculate his or her cumulative trading gain or loss in XYZ on a daily basis to see if wash sales apply. The original day's loss is a wash sale and it must be deferred to the cost basis of the next position opened in XYZ. This trader will be in a wash sale loss condition until that trader has a cumulative gain on all prior positions in XYZ. Each cumulative position starts when the last one went positive, and prior wash sale losses are zeroed out to a gain (and they no longer apply). The problem is that this exercise of accumulating positions is very difficult for active traders.

Based on a strict interpretation of the wash sale loss tax laws, it is conceivable that the above trader could have a wash sale loss going back to the first day he or she began trading XYZ. Wow, would that be a nightmare!

However, if you have a large taxable capital gain and you do not account for wash sale loss deferrals, then you are understating your tax liability and subjecting yourself to penalties and interest if your return is examined by the IRS.

If any of these scenarios apply to you and you are not sure what to do, e-mail info@greencompany.com

Good news!
Check out our new "Advocacy campaign" to seek relief for all traders to be exempt from wash sale rules. We need your help to enact this change. Click here.

Ready for a consultation with a GTT CPA