EDUCATION CENTER
Accounting for Trading Gains and Losses

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When it comes to a trading business, it’s wise to do separate accounting for trade accounting and business expenses. A consumer off-the-shelf accounting program is fine for keeping track of expenses, and even your entire financial affairs, including income, home office deductions and itemized deductions. But, when it comes to trade accounting, these programs are inadequate — you need a specialized program like TradeLog for securities. TradeLog generates the complex Form 8949 that you need to feed and attach to your Schedule D, which can be generated in summary form in your tax software program.

For futures, accounting is a snap, as you can skip it and rely on the tightly controlled one-page 1099-B with summary reporting, using MTM reporting. Although forex accounting could be a nightmare if you try to do it yourself, you can rely on the broker’s annual tax reports and should use summary reporting. Forex is not a “covered security,” so there are no Form 1099-Bs.

SECURITIES TRADERS
Securities traders generally have it the worst when it comes to accounting and tax reporting. The IRS insists on line-by-line trade reporting which can be a huge file for hyperactive traders (see Chapter 6). Securities traders using the default cash method need to account for wash sales, straddles, and other timing issues, which can be very confusing. Although many brokers have improved their year-end tax reports, having your own software (such as TradeLog®) seems to be the only reasonable solution for securities traders.

New for 2011, Form 1099-B not only reports proceeds on securities (not options) it also reports cost-basis on securities purchased in 2011 and whether they were held short-term or long-term. Although, it doesn’t report net trading gain or loss.

FUTURES TRADERS
Futures traders receive a Form 1099-B showing “Aggregate Profit or Loss,” which includes realized and unrealized gains and losses. Simply enter that summarized amount on Form 6781 line 1. Futures traders can skip using trade accounting software and rely solely on brokerage-firm reporting.

FOREX TRADERS
Forex traders usually receive an online report from their broker showing net forex trading gain or loss. Forex brokers aren’t supposed to issue a Form 1099 for forex trading gains and losses. If a forex broker doesn’t provide adequate trade accounting or a Form 1099, a trader may have a difficult time. In that case, we suggest annual performance record reporting.

Rollover transaction reporting is not always clear.

This is an excerpt from Green’s 2012 Trader Tax Guide • Copyright © 2012