Tax season is always a stressful time for traders and other people who earn money on the market. This year, it is especially important to get professional help from a qualified CPA with your taxes as the IRS scrutinizes stock traders even more. Here are just a few of the pitfalls.
Matching Forms 8949 and 1099-B
One key issue for traders is that the information on your 1099-B will not match that on your Form 8949 for the tax year. The boxes don’t match, which can lead to a discrepancy that automatically triggers an audit. The areas most likely to have these mismatches are holding periods, wash sales, and cost-basis. Complying with Section 1090 rules will not prevent this; in fact, complete compliance is a major contributing factor.
IRS Scrutinizes Stock Traders Via Trader Tax Status
Another area in which the IRS scrutinized stock traders is in the area of trader tax status, or TTS. Only trading business expenses are allowed while trading income is reported elsewhere, which can make it look like a business is consistently losing money (and thus a hobby). If you are a sole proprietor business trader with loss reported on the Section 475 MTM, you will likely hear back from the IRS. These losses can generate net operating loss refunds, which always gain IRS attention.
Section 475 Compliance
There have already been several people red-flagged this year over noncompliance and improper identification on Section 475. Make sure your trading and investment positions are completely separated according to the letter of the law. Failure can result in high penalties and interest payments.
The IRS is cutting back on agents, but their computer systems are expected to make up the slack. The result is that any discrepancies will result in red-flagging, even if they are caused by issues with the IRS’s own instructions. If you are a trader, you are more likely than ever to be audited or have your return gone over with a fine tooth comb. This year, it is more important than ever to make every line of your taxes impeccable
