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Investors & Traders, It’s Tax Time. Your To-Do List

March 5, 2015
Time to file tax returns

Note: Neither TD Ameritrade nor Investools provide tax advice. We suggest that you seek the advice of a qualified tax-planning professional with regard to you personal circumstances.

With the April 15 deadline looming, it’s time for investors and traders to embrace their special tax-time responsibilities. For starters, Uncle Sam demands we fill out the necessary forms to complete a Schedule D.

There are three things you should discuss with your tax advisor before completing your Schedule D: Form 8949 and its three categories, Section 1256 contracts, and collectibles tax treatment.

If you have been involved in trading and investing for a while, you are probably familiar with the Schedule D. Starting in 2011, the Schedule D changed from the form where all trades were reported to a summary page of all capital gain (and loss) information. Now the individual transactions shift to Form 8949: Sales and Other Dispositions of Capital Assets. This change came about as part of the Emergency Stabilization Act (ESA) of 2008.

A Little History

The crux of the ESA was to gain more complete reporting of assets and cost basis. Prior to the ESA, reporting varied somewhat and was difficult to track. Lawmakers felt that revenues were likely being lost due to failure to report. ESA aims to gather more information from brokers, closing the gap on revenues through cost basis reporting. The act has certainly provided more reported information, but it has also created more work for the brokers and taxpayers to repeat the same previously reported information.

What’s important to know about the Form 8949 is that all transactions are placed into one of three categories. Taxpayers are required to file a separate form for each.

The categories and the boxes to select on the form are:

  • Box A if your broker reported the transaction to you and the basis of the securities sold was also reported to the IRS
  • Box B if the transaction was reported to you, but box 3 of the Form 1099-B is blank or your statement says the basis was not reported to the IRS
  • Box C for all other transactions

Everything in Its Place

You will need to report or create a report that shows all transactions. Many tax software programs will assist you in creating your Form 8949, including adjusting for wash sales. A professional tax advisor should be able to do the same with your exported brokerage statements.

Keep in mind that most property owned and used for personal purposes, pleasure, or investment is a capital asset. Use Form 8949 to report the sale or exchange of a capital asset you are not reporting on another form or schedule (such as Form 6252 or 8824).

Short-term capital gains or losses (assets held for one year or less) are now reported on Part I of Form 8949. Long-term capital gains or losses (assets held for more than one year) are now reported on Part II of Form 8949. There are other transactions that don’t fit into the Form 8949 that will still go to your Schedule D summary page, such as section 1256 Contracts.

Futures, Forex, Options—Oh, My

Trading involving futures, foreign exchange, index options, straddles, and those that have elected marked- to-market will complete and file Form 6781 for Section 1256 Contracts and Straddles.

Here’s a shocker for this time of year: This requirement can be considered good news.

Section 1256 Contracts and Straddles get special tax treatment of 60/40. This means that positions held for any amount of time will receive 60% long-term capital gains treatment and 40% short-term capital gains treatment.

As an example, if you held a futures contract for three days and had a net gain of $1,000, $600 would be treated and taxed at the lower long-term capital gains rate and $400 would be treated and taxed at the higher short-term capital gains rate.

This “preferential” tax treatment doesn’t stop there.

Section 1256 contracts are not subject to the same wash sales rules as equities. Additionally, the net gains and losses are carried over to the Schedule D. If there is a loss on 1256 contracts, they can be carried back, meaning they can offset the current or previous year’s gains.

One More Thing

Many traders may not realize they could be subject to collectible tax rates. There are a number of exchange-traded funds (ETFs) that are commodity-based and hold physical gold, silver, or other metals. Many traders assume that holding these ETFs for over a year will get them the long-term capital gains rate. The long-term capital gains rate can be as low as zero, or as high as 23.8%. The higher capital gains tax rate is due to the Affordable Care Act (ACA), which adds a 3.8% surcharge to higher earners.

Be aware: ETFs that hold physical commodities or collectibles are taxed as a collectible for the applicable portion. Collectibles are taxed at the higher collectible rate, which is as high as 39.6%. This collectible taxation is reported on a K-1 and not on a 1099-B. K-1 is the same form used for a partnership return, and each field is reported in the appropriate section of the 1040.

Just take it form by form. As you well know, it’s better to be paper-logged now than the target of an audit letter later.

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