Tax Education Center


Completing the Schedule D is increasingly more difficult each year. Tax laws keep changing, companies are re-organizing their equity structure more frequently, and most brokers still do not provide their customers adequate information for completing their Schedule D.

Investors receive form 1099-B each year listing all sell transactions and proceeds. Investors are then responsible for matching appropriate purchases against each sell, using original cost basis figures to calculate gains and losses, and to calculate holding period for each lot to properly characterize gains and losses. Sells can be applied across multiple lots, which could result in both short and long term gains and losses.

Before an investor can begin gain/loss calculations, they must first scan their trading history to see if any trades resulted in a wash sales transaction. If so, they must make appropriate cost basis adjustments and defer some of their losses.

Investors also need to modify their holdings for any corporate actions. A corporate action is essentially any material change to a security, including name changes, stock splits, spin-offs, and mergers, to name just a few. In many cases, a corporate action will result in a new position or a change to the cost basis of a security. Not surprisingly, it is up to the investor to make all necessary cost basis adjustments for each security.

Here are tips to help you successfully complete your Schedule D:

Holding periods and gain/loss characterizations
Annual $3,000 capital loss limit
Wash Sales
Are you an Investor or a Trader?
Presentation Matters

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Holding periods and gain/loss characterizations

Long-term gains are defined as securities held for more than a year. Short-term gains are defined as securities held a year or less. Since short-term gains are taxed at your income rate (possibly as high as 35%) and long-term gains are taxed at a fixed 15%, it is tax efficient to sell for a gain after you have held a stock for more than a year (long-term) and sell for a loss when you have held a stock for a year or less (short-term). Smart investors will try to offset all short-term gains with short-term losses before year's end. In addition, after you offset all your capital gains, you can use any remaining losses to offset as much as $3,000 in ordinary income.

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Annual $3,000 capital loss limit

If you have a net loss position, the IRS allows you to write off $3,000 per tax year. If you have net losses greater than $3,000 you can carry those additional losses forward to subsequent tax years. Complete the Capital Loss Carryover Worksheet in the Schedule D to determine what portion you are carrying forward. Utilizing the $3,000 capital loss write off can result in substantial savings for taxpayers.

Married couples are only allowed to write off a total of $3,000. The annual limit for married couples filing separately is $1,500 each. This is a true marriage penalty.

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Wash Sales

The IRS created the Wash Sales rule to prevent tax-payers from realizing losses for tax purposes and then buying back into the same security. You cannot deduct losses from securities if you re-purchase that security either 30 days before or after you sell it for a loss. If you do re-purchase the security within the 61-day window, the loss is deferred. The loss is added to the cost basis of the replacement shares purchased, and the holding period of the replacement shares includes the holding period of the original shares sold.


Confused yet? Let’s say you sold 100 shares of Amazon for a $3,000 loss and then re-purchased 100 shares, within 30 days, for $5,000. Because of the wash sale, you are not allowed to report the $3,000 loss on your Schedule D and the cost basis of the new lot becomes $8,000.

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Are you an Investor or a Trader?

If you meet the IRS's definition of a "Trader", you can save big bucks come tax time. According to the tax law, "Traders" are in the business of buying and selling securities. ----- Not so fast! I know what you are thinking. "I'm a trader". Shoot, you probably flipped three stocks last week for over a $6,000 gain. Unfortunately, even if you have two online accounts and you place a few trades a week, the IRS still considers you an "Investor."

How to Qualify as a "Trader"
To determine if you qualify as a "Trader" versus an "Investor", we can only follow the guidelines determined by several court cases addressing this issue.

SmartMoney states, "The court says you are a trader if:

  • You spend lots of time trading (more than 20 hours a week). Preferably, you don't have a regular full-time job.
  • You have established a regular and continuous pattern of making lots of trades. Probably multiple buys and sells for every day the market is open. Vacations are understandable, but lapses of weeks or months without any trading activity will immediately move you from "Trader" to "Investor" status.
  • Your goal is to profit from short-term market swings rather than from long-term gains or dividend income. What is profiting from short-term market swings? Getting in and out of a position on the same day or within a week. Holding stocks for a month or two blows any chance of claiming trader status.
  • You don't use the Small Order Execution System (SOES) for your trades. Only amateur investors are allowed to use SOES, by using SOES you would be telling the SEC you are an amateur while trying to tell the IRS you are a pro trader.
  • Satisfy the above requirements for an unbroken string of at least six months.

Benefits of "Trader" Status

  • Deduct all your investing expenses on Schedule C, like any other sole proprietor. This eliminates the need to claim these expenses on Schedule A and eliminates the limitation of only writing off the amount that exceeds 2% of your gross income. Furthermore, Schedule C write-offs reduce your adjusted gross income, which makes it more likely that you can fully deduct all your personal exemptions.
  • Deduct your margin account interest on Schedule C.
  • Write-off up to $25,000 a year for equipment used in your trading activities (computers, magazines, Bloomberg, fax machines, office material) under Section 179.
  • Exempt yourself from all wash-sale rules (See Wash-Sales for more info.)
  • Deduct an unlimited amount of losses versus the investor's limit of $3,000 in capital losses."

Is it possible to qualify as both a "Trader" and an "Investor?"
Sure is! The trick is to handle your "Trader" investments differently than your "Investor" investments. In order to treat investments differently, you must separate your long-term holdings (Investor Status) from short-term holdings (Trader Status) by identifying them as such in your records on the day you buy the holding. It would help your claim as both Trader and Investor status if you actually created a separate account. That is, a trader account and an investor account.

Please consult your tax advisor for details on filing Schedule D and C under "Trader" status and the IRS Revenue Procedure 99-17 at the IRS website, or go to Tax Forms to download the latest IRS tax forms. The information provided above is intended as a preliminary status check, not the bible in Tax Law.

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Presentation Matters

One final note to remember when filing your tax return: be sure to provide accurate backup documentation of your trading records. This will appease the IRS and minimize the chances of an audit on your return. Also, be sure to include backup confirmations from your broker on all specific lot transactions with your tax return. Rule of thumb, if you can’t figure out your own report, chances are the IRS won’t either. The last thing you want is a mandatory appointment with an IRS agent next summer to decipher your records.

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