Tax Treatment On Financial Products

Which financial products you trade and where you trade them can make a huge difference in tax savings.

Tax treatment affects investors, retail business traders, proprietary traders and hedge funds. But sadly, many tax preparers overlook significant differences in tax treatment for these groups, resulting in overpayments. Education is essential — this section contains valuable information about tax treatment for various financial instruments. 

While you might expect that broker-issued 1099-Bs would handle all of these complicated issues, but for some tax treatments, they do not. Broker compliance rules are different than rules taxpayers must follow on Section 1091 wash sales on securities. Some brokers mislabel Section 1256 contracts, too. It depends on the taxpayer’s facts and circumstances and elections made. You can’t expect a brokerage firm to police your elections, determine if you qualify for trader tax status (TTS) and find out if you’ve filed a timely election for Section 475 MTM. Brokers should issue 1099-Bs for the “everyman,” not based on your facts and circumstances and elections filed.

Is it capital gains or ordinary income?

Most financial instruments — including securities, Section 1256 contracts, options, ETFs, indexes, precious metals and bitcoin held as a capital asset — are subject to capital gains treatment. By default, forex contracts and swap contracts are subject to ordinary gain or loss treatment. The distinction between ordinary and capital gains treatment makes a big difference. The capital loss limitation is a problem for traders and investors who may have trouble using up large capital loss carryovers in subsequent tax years. Traders with TTS and a Section 475 MTM election have business ordinary-loss treatment, which is more likely to generate tax savings or refunds faster.

Go to “Explore Tax Treatment On Financial Products” on the upper-right of a computer, or below on a mobile device.

For more in-depth information on tax treatment, read Green’s 2016 Trader Tax Guide.