Note: TD Ameritrade does not provide tax advice. We suggest that you seek the advice of a qualified tax-planning professional with regard to your personal circumstances.
With the April 17, 2018, tax 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've been involved in trading and investing for a while, you're 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 gains (and losses) information. Now the individual transactions shift to IRS Form 8949: Sales and Other Dispositions of Capital Assets. This change came about as part of the Emergency Economic Stabilization Act (EESA) of 2008.
A Little History
The crux of the EESA was to gain more complete reporting of assets and cost basis. Prior to the EESA, reporting varied somewhat and was difficult to track. Lawmakers felt that revenues were likely being lost due to failure to report. EESA 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 brokers and taxpayers to repeat the same previously reported information.
What’s important to know about the Form 8949 is that there are six classification buckets required for sales and dispositions transaction details. Our recent primer explains the details of covered and noncovered securities and the tax implications of each.
Everything in Its Place: Form 8949 Instructions
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
Have you traded futures, foreign exchange, index options, or any products that are marked-to-market? If so, you'll need to file Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.
Here’s a shocker for this time of year: This requirement can be considered good news.
Section 1256 contracts 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 long-term capital gains rate and $400 would be treated and taxed as ordinary income, which is often a higher 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 more than a year will get them the long-term capital gains rate, which 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.
But be aware: ETFs that hold physical commodities or collectibles are taxed as a collectible for the applicable portion, which may be subject to a higher tax rate. 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.
This article is an update of the original "Investors & Traders, It’s Tax Time. Your To-Do List," published on March 5, 2015.
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