1/19/06 - Is the IRS forcing line-by-line reporting of capital gains and losses so they can attack trader tax status?

Is the IRS forcing line-by-line reporting of capital gains and losses so they can attack trader tax status? Summary tax reporting hides the number of trades; whereas line-by-line reporting showcases your full trading activity. Is your trader tax status in jeopardy?

An article by Robert Green, CPA 

Are the recent Schedule D rule changes and clarifications giving the IRS more ammunition to attack trader tax status? Yes, in our view.

Securities trades are listed (line-by-line) on Form 1099-Bs, but the IRS does not access Form 1099 when processing your tax return. So unless you list each trade on your tax return, the IRS won’t see your full trading activity. 

Thousands of traders are probably claiming business treatment (trader tax status) on too little a number of trades - in the eyes of the IRS. There are no objective IRS rules (numbers of trades) for qualification; trader tax status is based on existing case law. We cover this topic in-depth in my book The Tax Guide for Traders (Chapter I).

Lot’s of active traders have been filing tax returns with summary reporting (with details available on request and no attachments) and the IRS can’t see if they trade infrequently. The IRS can see total proceeds, but that is not always a good indication of volume. The IRS now wants to see more trading details including: the volume of trades; how many days you traded during the year; any sporadic lapses in trading; and more.

With line-by-line reporting for securities, the IRS can see your full trading activity and attack your trader tax status more easily. Be prepared to explain your activity levels in a tax return footnote.

If you use mark-to-market accounting (MTM), you report your trades on Form 4797 Part II (ordinary gain or loss) and not Schedule D. Line-by-line reporting is also required on Form 4797 Part II per the form’s instructions. You can use our GTT TradeLog and attach the line-by-line reporting. But if GTT TradeLog is not a good solution for you, instead use our GTT Inventory Approach worksheets. Note these worksheets do not list numbers of trades. You will then be accurate and compliant on including an attachment; just not an attachment with all the details – which the IRS may be most interested in seeing.

This is as good a time as ever to re-evaluate your trader tax status and discuss it with a trader tax expert, like our firm.

The IRS tax forms are designed for maximum compliance with the tax laws. Telling the IRS that you are summary reporting an accurate number is not good enough anymore. The IRS wants to see your trading activity details and assess much more than accuracy; they want to address trader tax status, wash sales, straddles and more!

When you trade stock options, futures or forex, the IRS can not see your number of trades on a Form 1099. But you need to report line-by-line trades for stocks options just like stocks. Futures and forex traders have a reprieve from these rules; they can continue to summary report and not show all details to the IRS. This can be good for traders with low activity and bad for traders with lots of activity. If you have a strong case, you want to show it.

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