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Short Sales Not Grouped and 1099 Totals
Posted by Henry Gage on 15 April 2010 12:41 AM
Regarding: Short Sales Not Grouped and 1099 Totals

Question:
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1099s in my case report short transactions still open at reporting period end as "sales" and accumulate these sales amounts in their reported 1099s. Consequently, TA calculated trade sales numbers do not match 1099 reports.

TA in the "Reconcile" process provides an "Adjustment" entry for such discrepancies. However nowhere does TA find these open trades and report them as adjustments to the 1099 or suggest how we, the tax filers, should to so in processing our TA reports.

What is the best way to find and enter these adjusted discrepancies so that they will clearly show up on our Schedule Ds and explain the 1099 differences to a reviewer?

Answer:
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We don't provide tax advise but it seems like a better idea to not make this kind of adjustment to data because the positions are actually open. This is a case where trading has out paced tax reporting methods. Here is how we think about the issue.

The concept of a sale implies there is an opening transaction that is closed and it is possible to calculate a gain/loss. In the case of Short Sales that are not closed, this is not possible. For more insight, see this section of IRS 550 then make a logical decision based on your preference and the guidance of your tax adviser. Do not be surprised if you are better informed them most folks you ask to resolve this puzzle...

http://www.irs.gov/publications/p550/ch04.html#en_US_publink100010586
"You do not realize gain or loss until delivery of property to close the short sale. You will have a capital gain or loss if the property used to close the short sale is a capital asset."

Anticipating this we have included a view within the reconcile Gain/Loss tool (Tools/Reconcile Gain/Loss, Continue, Tab 7 Gain/Loss Report). This report shows the status of Sales. In addition TA includes a "Summary Report" (see Tools/Reconcile Gain/Loss/Print or see Print Preview/Status Summary Report). Here are two ways others have resolved this case...

Approach I: Show it As Is...
Let the Sales total be different than the 1099. Audits are typically associated with a random selection of tax ids followed by the collection of data to substantiate the data. In this case if this report is associated with an audit then additional reports will show the trades were still open. Then show the agent the section of the code above.

Approach II: Use a Partial Marked to Market Approach...
As an alternative you could create a closing trade on 12/31 for each open trade and then open the trade again on 1/1 at the same price. For the price, check the market price on the date you close the trade. This approach would then include the sales in the 1099.

As you can see both cases have issues.

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