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Just now, greenspan76 said:

Actually, I thought it used to be done that way, but I haven't looked back to verify, so its possible I said that. If so, sorry for the confusion.

No worries. Thanks to you and @yowster as well as @cwelsh I sm looking into this in more details although I agree with you that IB is likely to be computing it correctly. The weird thing I find is that the number don't seem to make sense. For example, if I ignore wash sales, 1099 would show a loss for the year but taking wash sales into account it shows trading gains for the year. If I run a yearly statement for 2017 from IB, it shows gains. That is really what is confusing me. 

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13 minutes ago, anand331 said:

No worries. Thanks to you and @yowster as well as @cwelsh I sm looking into this in more details although I agree with you that IB is likely to be computing it correctly. The weird thing I find is that the number don't seem to make sense. For example, if I ignore wash sales, 1099 would show a loss for the year but taking wash sales into account it shows trading gains for the year. If I run a yearly statement for 2017 from IB, it shows gains. That is really what is confusing me. 

When you have a wash sale, your cost basis is adjusted for the new position that caused the wash sale. So, for example, if you sold an XYZ put for a loss of $100, but then bought another XYZ put 1 weeks later, your cost basis on the new XYZ put is increased by $100 to account for the loss you were not allowed to recognize on the prior put.. Hence, your reported cost basis numbers are higher by the amount of wash sale losses disallowed that have already been closed (if you still have some open, they won't show up on the From 8949 worksheet yet). Now that I think about it, this might be the confusion on the cost basis being already adjusted.

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1 minute ago, greenspan76 said:

When you have a wash sale, your cost basis is adjusted for the new position that caused the wash sale. So, for example, if you sold an XYZ put for a loss of $100, but then bought another XYZ put 1 weeks later, your cost basis on the new XYZ put is increased by $100 to account for the loss you were not allowed to recognize on the prior put.. Hence, your reported cost basis numbers are higher by the amount of wash sale losses disallowed that have already been closed (if you still have some open, they won't show up on the From 8949 worksheet yet). Now that I think about it, this might be the confusion on the cost basis being already adjusted.

This makes perfect sense. Thanks so much @greenspan76. So, unless I have any trades that are still alive at the end of the year, the wash sale shouldn't have any impact and that's really what I was seeing. Just couldn't explain why. Appreciate your time and detailed responses.

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On 4/4/2018 at 10:45 AM, anand331 said:

Hi @Yowster, I just checked one of my accounts at IB and the proceeds and the cost basis as reported on 1099 do not account for wash sale. However, the 8949 form does account for it when coming up with gain or loss. Is it your experience as well? I know it is more of an accountant question, but if I have wash sale losses denied for 2017 for certain option trades and if I don't ever trade the option on that underlying in 2018, would that wash sale loss be gone forever?

@anand331 Sorry for the delay in responding, but I've been on vacation and away from trading since last Wednesday afternoon.   On my IB 1099, when I take my Proceeds-CostBasis+WashSaleLossDisallowed the result matches my own records for overall P&L.   Also, the wash sales don't appear to be "real" wash sales when you buy something back within a month or so - Rather, they seem to be how IB does some record-keeping when individual option prices are different.   For example, occasionally I'll open a spread trade for say 10 contracts and all are filled at the same price - however when I look at the individual prices for the long and short legs one or two of the fills have prices way out of whack, and these are the trades that seem to show up in the 1099 wash sales.

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12 hours ago, Yowster said:

@anand331 Sorry for the delay in responding, but I've been on vacation and away from trading since last Wednesday afternoon.   On my IB 1099, when I take my Proceeds-CostBasis+WashSaleLossDisallowed the result matches my own records for overall P&L.   Also, the wash sales don't appear to be "real" wash sales when you buy something back within a month or so - Rather, they seem to be how IB does some record-keeping when individual option prices are different.   For example, occasionally I'll open a spread trade for say 10 contracts and all are filled at the same price - however when I look at the individual prices for the long and short legs one or two of the fills have prices way out of whack, and these are the trades that seem to show up in the 1099 wash sales.

Thanks @Yowster. I think the reason probably is as @greenspan76 above suggested, IB is adjusting the cost basis for some contracts to track the wash sales and recapture it when the next trade is closed. I also found that (proceeds - cost basis + wash sales) matches my own p&l calculations, but I was confused by the large wash sale amount shown.

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13 minutes ago, anand331 said:

Thanks @Yowster. I think the reason probably is as @greenspan76 above suggested, IB is adjusting the cost basis for some contracts to track the wash sales and recapture it when the next trade is closed. I also found that (proceeds - cost basis + wash sales) matches my own p&l calculations, but I was confused by the large wash sale amount shown.

@anand331For me, out of my large number of trades in my 1099, the vast majority of wash sales came for one or two specific trades - and they weren't even particularly large allocations.

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That is strange because from my SO trades a large percentage was flagged as wash sales. Big ones being NFLX (straddle strangle combo) and GOOG but many small trades as well. In any case, the final numbers look correct, so not worried anymore. I also let TradeLog trial lapse, although IB doesn't treat VXX, VIX, SVXY, UVXY trades as section 1256 whereas tradelog does (as @ChadK pointed out earlier in his post). Since most of these trades get closed before the year is over, it doesn't really make that much difference for me.

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I read through this thread to get an idea for what others are doing with respect to taxes and trader status. For me, 2018 will be the first year where I would qualify as a trader as per Section 475(f). I understand that, broadly speaking, I have to follow a 2-step process:

1) elect mark-to-market accounting by attaching a statement with my tax return this year (AY2017), and

2) Attach form 3115 (Application for Change in Accounting Method) with my tax return next year (AY2018).

 

Assuming this is accurate, I'm trying to figure out how to attach the statement with my 2017 tax return if I'm e-filing through H&R Block. Is this possible, or will I have to file on paper ? Any information would be helpful.

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Am I correct that selling losing stock and buying an in the money call option will be considered a wash sale? Basically this has been a great year for short-term trade closed out using So strategies but my long-term Holdings mostly in spy have my acct at even on the year but 12k in realized gains I'll have to pay taxes on.  Unless I can do the trader status which may work based on some research as I do own a business?  Can i get the same delta of 250 spy using /es and some options?

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35 minutes ago, lrfsdad said:

Unless I can do the trader status

Based on my research, and assuming you're in the US, you have to make the Mark-to-market election along with your prior year's tax return, and then apply it to the current year's taxes.

PS: I'm no expert. I'm just sharing what I've learned during my own journey towards Trade Tax status.

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Can someone help me with a few tax questions?  I'm using TOS, and according my 1099 form, my profit for 2018 is about 15% higher than my actual profit for the year (based on my personal records).  I assumed my accountant made a mistake and forgot to subtract my commissions from my profit.  If the commissions are subtracted from the net gain reported on my 1099 form, then this value would match my personal records.  I called TOS today, and they said that my commissions and fees are included in my cost basis for each trade.  So something is not right.  Could wash sales be the reason why my reported net gain is greater than my actual net gain?  Can someone explain how I can find out how much of my P/L is a result of wash sales?  Thank you in advance!

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6 minutes ago, Hany said:

Can someone explain how I can find out how much of my P/L is a result of wash sales? 

Just a quick response - TD Ameritrade provides 2 spreadsheets in the Tax Center Gain/Loss area of their website. One includes Wash Sales, and the other excludes them. You should be able to compare them.

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I found the documents!  Thank you so much, @rasar!  I really appreciate your help.

However, this raises another concern.  How can I have a wash sale if I closed all positions by the end of the year?  It doesn't seem right that I should pay taxes on gains I did not make.  Is it possible that TD Ameritrade made a mistake?

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15 hours ago, Hany said:

I found the documents!  Thank you so much, @rasar!  I really appreciate your help.

However, this raises another concern.  How can I have a wash sale if I closed all positions by the end of the year?  It doesn't seem right that I should pay taxes on gains I did not make.  Is it possible that TD Ameritrade made a mistake?

I had the same exact thing happen to me.  Ended up owing taxes last year even though my account was basically flat.   My understanding is that you if you had wash sales and then opened trades in the same stocks in December those losses will not get realized until January so they essentially roll forward into the 2019 tax year and your 2018 returns only show them as disallowed wash sales.   I believe you will then see the loss in your 2019 tax statements (assuming you did not open any new positions for those same stocks within 30 days).  So you will still get the benefit of the loss, you just have to wait 12 months to realize it.

 

This was such a headache for me that I am now doing most of my options trading in my IRA to avoid all the tax issues.  

 

I found this podcast helpful where they address wash sales for options:  https://optionalpha.com/options-trading-taxes-part-2-19229.html

 

Edited by FrankTheTank

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Disallowed wash sales are those that are a result of first taking a loss, and then buying the same "thing" again within 30 days - either before or after the sale, and any of your own or your spouse's accounts. That's the problem with wash sales. It's one of those pitfalls in the tax code, and it affects option traders a lot. You can take the loss eventually, but only after you've stopped buying the "thing". I'm getting way out of my depth here, so definitely do NOT take this as advice of any sort. There are many good articles about wash sales that explain the various scenarios and situations.

Edited by rasar
Clarified timing of buy, and also scope of accounts.

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Thank you so much @frank the tank and @rasar for responding to my questions!  You guys are awesome!

I've been a member of SO for many years, but I've participated in only a few trades during this time.  SO has been an enormous learning experience, and trading has been more of a hobby and a curiosity than a way to make money.  Last year was the first year I made any real money.  This wash sale thing is ridiculous.  I've been doing more reading about it.  Am I correct in assuming that if I make no trades in the month of December (31 days), I won't generate any disallowed wash sales for the year?  I've scheduled a meeting with my accountant tomorrow, so I'll ask him this question.  If this problem with wash sales continues, I might invest in software like TradeLog to keep track of these trades.  Thanks again!

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13 hours ago, Hany said:

Thank you so much @frank the tank and @rasar for responding to my questions!  You guys are awesome!

I've been a member of SO for many years, but I've participated in only a few trades during this time.  SO has been an enormous learning experience, and trading has been more of a hobby and a curiosity than a way to make money.  Last year was the first year I made any real money.  This wash sale thing is ridiculous.  I've been doing more reading about it.  Am I correct in assuming that if I make no trades in the month of December (31 days), I won't generate any disallowed wash sales for the year?  I've scheduled a meeting with my accountant tomorrow, so I'll ask him this question.  If this problem with wash sales continues, I might invest in software like TradeLog to keep track of these trades.  Thanks again!

I think that is correct and to be safe I may stop trading options in my taxable account around Thanksgiving (or at the least make sure to not open as potential wash sale positions after that point).

 

Good luck with your accountant and let us know what they say.   When I met with accountant a few months ago the guy did not understand options so he was not very helpful with the wash sale question.   

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4 hours ago, Yowster said:

That 100K portfolio max is a general guideline setup by @Kim, people use various allocation sizes but we have no way of knowing the different trade sizes that members use.   That said, certain stocks whose options have very large volume/OI can scale up to any allocation size.   For those with more moderate volume/OI, having large allocations could possibly cause some pricing issues when trying to open or close.    It would be great if all options had high volume/OI with tight bid/ask spreads - but there aren't enough stocks like this so we have to also use some with more moderate volume/OI.

Doe anybody know the IRS guidance on losses on rollover when we use an iron condor or a butterfly strategy ? can they deny the losses incurred for taxation under the 30 day wash rule for securities and still tax the profits occurred as part of that strategy ?

 

Edited by skalmadi

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29 minutes ago, Peeyotch said:

Probably. Options contracts on equities very quickly fall afoul of the wash sale rule. 
 

https://www.tradelogsoftware.com/resources/wash-sales/

 

Disclaimer: I am not a lawyer or accountant. Trade Log is the software I use to handle my trading taxes. 

Thanks. Very informative website. The  30 day wash rule as it applies to rolling losses on butterflies or iron condors , looks like it can be very tricky when rolling options. I wonder if some of the more experienced traders  have any tips or experiences regarding this. 

I found another website with examples of what is substantially identical securities

https://www.optionstaxguy.com/substantially-identical

 

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1 hour ago, skalmadi said:

Doe anybody know the IRS guidance on losses on rollover when we use an iron condor or a butterfly strategy ? can they deny the losses incurred for taxation under the 30 day wash rule for securities and still tax the profits occurred as part of that strategy ?

 

Spreads mean nothing for tax purposes. Each contract stand on its own. Rolled options can fall afoul of the wash sale rule, as @Peeyotch mentioned.

Check out the last section in this article.

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@skalmadi I used Turbo Tax and directly downloaded all the trades in my main account, IRA trades don't matter, you don't even have to report them because you are going to pay taxes on that money when you withdraw it.  But I sure thought Turbo Tax basically subtracted my output from my input, I did check to see if it was close to my trade log and it was but I didn't dig deep.  Rolls don't matter, a roll is just multiple options transactions.  I did notice that the import had every single option individually logged.  What I paid, what I received, it does not matter what order the buying and selling occurred.  I also elected "Active Trader" status so I could deduct other expenses.  I did run all of it past a tax attorney that was my go to guy when I had the business and he said it all looked good, so I felt pretty safe.

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5 minutes ago, Ringandpinion said:

....IRA trades don't matter, you don't even have to report them because you are going to pay taxes on that money when you withdraw it. ....

(Disclaimer - I'm not a tax expert)

I'd be careful with that statement. I'm fairly certain that wash sales do apply across *all* accounts. In other words, all transactions are recorded, and then processed to figure out wash sales.

From Investopedia: If a security is sold in a non-retirement account at a loss, then an identical investment is bought in an IRA, the result is a wash sale.

In any case, I think this topic should probably be moved to the tax-related thread (which I can't seem to locate now 😐. Maybe @Kim knows where it went.)

 

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26 minutes ago, Ringandpinion said:

@skalmadi I used Turbo Tax and directly downloaded all the trades in my main account, IRA trades don't matter, you don't even have to report them because you are going to pay taxes on that money when you withdraw it.  But I sure thought Turbo Tax basically subtracted my output from my input, I did check to see if it was close to my trade log and it was but I didn't dig deep.  Rolls don't matter, a roll is just multiple options transactions.  I did notice that the import had every single option individually logged.  What I paid, what I received, it does not matter what order the buying and selling occurred.  I also elected "Active Trader" status so I could deduct other expenses.  I did run all of it past a tax attorney that was my go to guy when I had the business and he said it all looked good, so I felt pretty safe.

If you select the active trader status, I think the 30 day wash rule may not apply to active traders. That is why turbotax may not consider any of those as "wash sales". 

 

From what I am reading,  @rasar comments also about IRA transactions can be regarded as being "similar" can be used for wash rules . 

 

You have to however meet the IRS requirement  for active traders, which are not well defined either, as to who qualifies.

 

I am not a tax expert, just a newbie trying to understand the IRS rules. 

 

I am sorry I put this question/conversation in this trade, I agree with the person above that this should be in a tax related thread. maybe @Kim or @Yowstercan help move this to the right thread.

Edited by skalmadi

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22 minutes ago, Ringandpinion said:

IRA trades don't matter, you don't even have to report them because you are going to pay taxes on that money when you withdraw it.

Not true, unfortunately… you need to be extremely careful about trading the same things in a taxable and IRA account or you could end up permanently disallowing a loss in your taxable account. The link I posted earlier has an entire section that details the issue; I highly recommend reading it. 

EDIT

As @skalmadi said, the rules may be different for those who elect active trader status. I can’t speak to that. 

Edited by Peeyotch

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I'm certainly no expert, but I have had various IRA's for many years and I've never seen any place on any tax return to list the capital gains or any gains or losses IN the IRA that aren't related to the tax deductible funding you put in once a year or the enumeration of the withdrawals you make when it comes time to use the funds.  So I have no idea where you could report capital gains, wash sales or any such if you wanted to.  So I made an assumption, and I should know better.

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12 minutes ago, Ringandpinion said:

I'm certainly no expert, but I have had various IRA's for many years and I've never seen any place on any tax return to list the capital gains or any gains or losses IN the IRA that aren't related to the tax deductible funding you put in once a year or the enumeration of the withdrawals you make when it comes time to use the funds.  So I have no idea where you could report capital gains, wash sales or any such if you wanted to.  So I made an assumption, and I should know better.

Excellent article from one of the law websites on the active trader exemption issues

https://andersonadvisors.com/trader_taxation/

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10 minutes ago, Ringandpinion said:

I'm certainly no expert, but I have had various IRA's for many years and I've never seen any place on any tax return to list the capital gains or any gains or losses IN the IRA that aren't related to the tax deductible funding you put in once a year or the enumeration of the withdrawals you make when it comes time to use the funds.  So I have no idea where you could report capital gains, wash sales or any such if you wanted to.  So I made an assumption, and I should know better.

At the risk of getting deeper into the weeds, Forms 8949 and Schedule D are where you identify the wash sales yourself after doing the analysis across all accounts. That is, you don't have to report the IRA transactions as such; instead, you ony list the transaction in the taxable account, and then identify it as a wash sale.

I think I'll stop now before I get myself into any more trouble.

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@Kim @Yowster

 

can either of you clarify the wash rule for me please ?

 in my fidelity account, i had about 20 thousand disallowed as wash sales, since i rolled over and bought the same option and sold it again.

 

is the rule that the loss on the prior sales, will be added to the basis of your new purchase and then when you sell it, you will get a final loss number , or is it that you completely lose the loss on the first loss for tax purposes, as long as these transactions are not pending at the end of the year ?

 

in effect scenario 1-- if the first sale loss is added to the basis of the second transaction, you lose nothing as long as you stop trading that security, and the effect vanishes 30 days after the last transaction with that CUSIP security ?

scenario 2-- the first sale loss is denied completely, then you have lost a ton of tax capital losses that you could otherwise claim on your tax returns

 

which one is correct ?

 

Edited by LaughingGas

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8 minutes ago, LaughingGas said:

@Kim @Yowster

 

can either of you clarify the wash rule for me please ?

 in my fidelity account, i had about 20 thousand disallowed as wash sales, since i rolled over and bought the same option and sold it again.

 

is the rule that the loss on the prior sales, will be added to the basis of your new purchase and then when you sell it, you will get a final loss number , or is it that you completely lose the loss on the first loss for tax purposes, as long as these transactions are not pending at the end of the year ?

 

in effect scenario 1-- if the first sale loss is added to the basis of the second transaction, you lose nothing as long as you stop trading that security

scenario 2-- the first sale loss is denied completely, then you have lost a ton of tax capital losses that you could otherwise claim on your tax returns

 

which one is correct ?

 

I am not a tax expert, I can only tell you how I handle this.    The year-end 1099 tax forms from your broker have a "wash sales disallowed" number.  Going into my tax prep, I've tracked all my trades so I know what my overall gain is, and when I add that "wash sales disallowed"  number back into the "proceeds" number and subtract out the "cost basis" the total comes out to the gain I expect it to be.   I can't say this holds true for everyone, but the math has always held true for me.      When I calculate my yearly gain/loss for these short term trades, I don't factor in any wash sales - I just add all the winning amounts and subtract the losing amounts (to me they were all short term trades and I was kind of surprised to see anything show up as a wash sale in the first place).  

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30 minutes ago, Yowster said:

I am not a tax expert, I can only tell you how I handle this.    The year-end 1099 tax forms from your broker have a "wash sales disallowed" number.  Going into my tax prep, I've tracked all my trades so I know what my overall gain is, and when I add that "wash sales disallowed"  number back into the "proceeds" number and subtract out the "cost basis" the total comes out to the gain I expect it to be.   I can't say this holds true for everyone, but the math has always held true for me.      When I calculate my yearly gain/loss for these short term trades, I don't factor in any wash sales - I just add all the winning amounts and subtract the losing amounts (to me they were all short term trades and I was kind of surprised to see anything show up as a wash sale in the first place).  

Thank you. Looks like you are right, the tax loss is not lost forever. it is "deferred".  Was worried about it all of yesterday, am a total newbie at this. 

Here is the explanation from HRBLOCK and another website

https://www.hrblock.com/tax-center/income/investments/wash-sales/

You’ll need to figure the basis for shares sold in a wash sale. When you do, add the amount of disallowed loss to the basis of the shares that caused the wash sale. These are the new shares you received. By doing this, you defer the loss, but it’s not disallowed for good. You’ll get the benefit of the loss when you eventually sell the new shares (unless it’s another wash sale!).

 

https://www.thebalance.com/wash-sale-rule-3192972

The tax benefit of your capital loss isn't gone forever, but it's deferred. The loss on the original investment will be taken into account when you sell your replacement shares by applying the losses to your adjusted cost basis.

 

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I have had no long term trades for the last 3 years.  All my long term stuff has been outside the stock market, so my trading has gross income minus gross costs = total profits.  Of course my costs included a few things other than commissions and the cost of equities purchased, but not many, even with the Active Trader designation.  So I guess my experience is not really relevant to the long term and wash sale rules. 

 

I really am a fan of Turbo Tax, I started using it before they were affiliated with Quickbooks and I used QB from 1995 to 2010 for all my business.  In 2010, my business was too complicated for me or QB to handle reporting to all the government entities and sending the appropriate money to them so I used an accountant and gave up QB.  A couple of years after the sale of the company when all my finances settled out from it, I went back to TT for my trading taxes.  If you set it for step by step instructions for the complete idiot, it's pretty hard to go wrong.  I'm sure some of the other outfits that do it are good, but I've used TT since the mid 90's.

 

Who are the two Men In Black knocking at my front door and why does it say IRS on their car?😱

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        $1.00 1 $1.63 2 $2.66 3 $4.33 4 $7.06 5 $11.51 6 $18.76 7 $30.57 8 $49.83 9 $81.22 10 $132.40 11 $215.81 12 $351.76 13 $573.38 14 $934.60 15 $1,523.40 16 $2,483.14 17 $4,047.52 18 $6,597.46 19 $10,753.86 20 $17,528.80  
      Is your mind blown again? The bad news is that we can't really control what the financial markets do, but the good news is that we have a reasonable degree of control over protecting our investments from income taxes. It just requires we pay attention to the vehicles we put our money into, and the type of trades and strategies we execute in taxable accounts. Many traders and investors ignore the impact of taxes when considering a product or strategy, but it's simply unwise to do so if you're in a high tax bracket. It's not how much you make, but how much you keep, net of all fees and taxes.

      That's especially true if you're also in a state with a high state income tax rate, such as CA or NY. Tax efficient vehicles, and tax efficient investment products and strategies are available to everyone today. As a CFP® professional, I can help my clients build long term financial plans and investment portfolios that align with both their unique willingness and need to take risk, as well as their unique tax situation. 
       
      Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University.
    • By Jesse
      I’ll also continue to assume a 32% tax rate for short term gains and 15% for long term gains.
       
      Writing puts on 1256 option contracts makes 60% of the gains Long Term Capital Gains, but those gains are fully taxable every year. This makes an 8% pre-tax return a 6.26% after-tax return. With an ETF BuyWrite strategy, most of the yearly profits will be unrealized in the form of share price appreciation. On an annual basis, I’m assuming the 8% return would be composed of:
      ETF dividend yield: 1.5% Short call option realized gains: 0.5% Unrealized share price apperception: 6%  
      If we assume 80% of the dividend yield is qualified dividends, and the call option gains are 1256 contracts, the annual after-tax return falls from 8% to 7.61%. Updating the chart from the Part I article comparing all three strategies, we see the following differences in long term after-tax performance:
       

       
      Summary
      This illustration shows how taxes are a very important long-term consideration in a taxable brokerage account. While the results of all three strategies would be the same in a retirement account, they are very different in a taxable account. An ETF BuyWrite strategy has the advantage of deferring taxes on share price appreciation until shares are sold, which the investor has full control over. An investor can also tax loss harvest shares when unrealized losses exist by swapping from one ETF into another that is similar but not identical, booking a capital loss deduction.

      After 30 days have passed, the investor is free to switch back to the preferred ETF. Investors who make charitable donations can gift highly appreciated shares instead of cash, then using the available cash to repurchase donated shares. The net result is an increased average price per share and lower future capital gains liabilities when shares need to be sold to meet financial obligations.
       
      In retirement an investor could use dividends, gains from calls, and sales of shares to meet their spending needs. Even if the investor were to fully liquidate the portfolio at the end of year 30 the after-tax amount would still be $831,622, well in excess of either PutWrite strategy. Since ETF’s can be used as collateral for a margin loan, an investor could also take tax free margin loans instead of selling shares to continue deferring unrealized capital gains. Under current US tax law, unrealized capital gains would effectively be erased at death due to receiving a step up in cost basis.
       
      Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University.

      Related articles:
      Tax Efficient Trading Part I: The 1256 Contracts The Magic of Compounding, and the Tyranny of Taxes Traditional or Roth Retirement Account? Investment Ideas for Conservative Investors What’s Wrong With Your 401(k)? (If anything) First Time Trader? Here Are 3 Tax Tips You Should Know  
    • By Jesse
      This is an advantage compared to stock and ETF options where realized earnings are reported as short term gains unless the contract is held for more than a year. In this article, I’ll provide a simplified example to illustrate how much of a difference this could make over the long term for someone paying 32% on short term gains and 15% on long term gains.

      An interesting side note is that taxpayers in the 12% federal bracket, which currently extends to just over $80,000 of taxable income for someone married filing jointly, pay 0% on LTCG’s under current law. This simplified example excludes other taxes that could apply to your situation including state income taxes as well as the 3.8% Net Investment Income Tax (NIIT).  I’m a financial planner, not a tax advisor, so readers should not consider this article to be specific tax advice. Always reach out to your own qualified tax advisor to discuss your personal situation.
       
      Let’s assume a trader is debating writing puts or strangles monthly using either XSP or SPY. Since these contracts are the same notional size they can be used interchangeably with the biggest difference being how XSP is cash settled and SPY settles into shares. For the sake of simplicity, we’ll ignore other variables that can weigh into this product choice decision such as liquidity, where SPY generally holds the advantage.

      Let’s then assume that the strategy is expected to make 8% gross annualized returns for the next 30 years with a $100,000 account. Net of taxes paid directly from the account, the 1256 contract (XSP) would return 6.26% and the traditional options contract (SPY) would return 5.44%. These differences in net return would compound to the following amounts in a $100,000 account over the next 30 years.
       
       
       
      Summary
      There are many important variables to consider when implementing a trading strategy. Commissions and slippage are routinely thought of by traders, but the long term impact of taxes are often overlooked. This example highlights how the tax advantage of 1256 contracts can be significant over a 30 year trading career. In my next article, I’ll extend the comparison to covered calls which can further improve tax efficiency. By making ETF’s the core asset, we gain more control over paying taxes by deferring capital gains until realized by selling shares or potentially even deferring them forever by taking a margin loan instead of selling shares.
       
      Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University.

      Related articles
      The Magic of Compounding, and the Tyranny of Taxes Traditional or Roth Retirement Account? Investment Ideas for Conservative Investors What’s Wrong With Your 401(k)? (If anything) First Time Trader? Here Are 3 Tax Tips You Should Know
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