Tax Tips for Active Traders

By Joseph L. Rosenberg, CPA

With the stock market showing signs of recovery after last year’s correction in most areas, now would be a good time to prepare yourself for what will come next by maintaining good financial records.

When you sell a stock you have bought, the difference between its selling price and its cost is either a gain or loss that must be reported on your tax return. Assets sold that were held for more than one year are taxed as capital gains, which may have lower tax rates than other income. If you own more stock in a company that you are selling, the shares being sold are usually determined on a first-in, first-out basis, unless you specifically identify which shares are being sold when you sell them. The broker can identify on the sell slip which shares are being sold. If you sell stock at a loss for which you purchased another block of stock within thirty days before or after the sale, you cannot realize a loss on the sale of the shares at the time (this is called the wash sale rule).

Be careful to adjust any cost figures for stock splits, otherwise you will overstate the cost of the shares sold. Also watch out for stock spin-offs, extra dividends and other unusual events. If you reinvest dividends in a mutual funds or in a stock, you need to track the purchases so that you do not understate the cost of your investment. You may have to contact the company’s shareholder relations department to obtain the information you need to properly account for the transactions. Sometimes you may have to attach a statement to the return showing that these companies have engaged in a tax free exchange when acquiring or exchanging shares from one company to another.

You may receive year-end brokerage statements identifying the cost and selling price of stocks you buy and sell. You must check them against your own records, because there can be errors. Also, if you inherit stock, your cost basis is the date of death valuation of the stock. In case of a gift, you take the cost basis of the person who gave you the stock. Most times the brokerage statements do not show the true cost basis in these cases.

If you trade online, make sure you retain any information from the brokerage company you will need to prepare your year-end returns. Proper matching of trades is essential.

With the move to manage accounts in the brokerage industry, the investor usually is charged a fee on the size of the assets in the account, or other fees depending on usage. These fees are generally deducted as investment expenses on Schedule A if you itemize, subject to a limitation of 2% of adjusted gross income. Active traders if they qualify may also be able to deduct other investment expenses regarding the maintenance of their records, custodial fees, and the like.

This brief discussion only scratches the surface as to the kind of financial record-keeping one should follow. Good record-keeping will enable you to make decisions regarding the sale of stock or mutual funds so that your year-end tax picture comes out per your expectations. Remember that you can deduct for federal purposes up to $3,000 of losses in excess of gains in one year; any additional losses can be carried to the following year. For New Jersey purposes, a net loss in a year cannot offset other income, and cannot be carried to another year. One year-end strategy would be to try to offset gains and losses so that there is no loss which would be lost for state purposes. To fine-tune your approach to making your records work for you, make sure you consult a capable advisor in this area. As always, contact a CPA or a Certified Financial Planner for expert advice.s.

Joe Rosenberg, CPA — operates his firm out of Florham Park, New Jersey. His practice consists of small business consulting, business planning, income tax preparation, and record-keeping. He is a Certified Quickbooks TM Advisor. Email him at josephlrosenbergcpa@consultant.com .