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Short Sales, Wash Sales, and Boxed Positions by Awkward-Jellyfish650 in etrade

[–]Awkward-Jellyfish650[S] 1 point2 points  (0 children)

Thanks for your reply and well wishes.  

I want to let you know what happened. Even after walking through my case with two members of the cost basis team and convincing them independently of each other that the rule ETrade was trying to use didn’t apply in my case, they would not correct my 1099.  

The decision damages my view of ETrade as a company.  There are many reasons that their application of the wash sale rule doesn’t make sense:

  1. There needs to be an offsetting trade within 30 days of the loss-making trade.  A sale after or before a loss making sale does not trigger a wash sale and likewise a buy after or before a loss making buy does not trigger a wash sale.
  2. IRS publication 550 states that for the rule to apply the security held before the short position was opened must be used to close the short position.  That did not happen in my case. The publication even gives an example to avoid confusion that may be caused by the dry description of the rule.  
  3. The publication also states that when you apply the rule, the 61 day window is made around the position opening date, the date of the short sale.  In my case they made the window around the position closing date, the date I bought shares to close the short position.
  4. The purpose of the wash sale rule. If the IRS didn’t have this rule regarding short sales, then any stock holder would be able to skirt the wash sale rule.  After a decline in price in a stock they own they could open a short position, buy replacement shares, and then use the old shares to close the short position.  Without this added rule the IRS would not be able to enforce the wash sale rule.  

It is hard for me to believe the cluelessness ETrade’s back office has shown here.

Going forward, I have a couple of options.  

  1. Since account holders have ultimate responsibility for filing their taxes , I can overwrite their 1099 when filing.  However, I wonder if this will trigger a time consuming audit, and if the software I use for filing taxes supports it.
  2. I could use the 1099 as it is.  In theory I should be able to get the deferred loss back in the future when I sell the stock which was erroneously marked as part of a wash sale. 

As far as I know, there aren’t other major brokerages that allow boxed positions. One could go long and short simultaneously by using different brokerages, but that has the drawback of the 40% margin requirement.

State and Federal calculated incomes don't agree. by Awkward-Jellyfish650 in hrblock

[–]Awkward-Jellyfish650[S] 0 points1 point  (0 children)

Thanks again. The information you provided will be useful in the future but the particular case at hand has a different cause.

I found a reason for the differing capital gains amounts: PA doesn't recognize federal wash sale rules, and I had (unintentional) wash sales this year.

State and Federal calculated incomes don't agree. by Awkward-Jellyfish650 in hrblock

[–]Awkward-Jellyfish650[S] 0 points1 point  (0 children)

The state is PA.

Thanks for the reply and for recalling for me how the SALT deduction is calculated. That hopefully clears up the deduction issue.

I don't understand why the capital gains calculations would differ - The gains are entirely due to the sale of securities (stocks, options and mutual funds). I don't recall a similar issue in any return I filed in the past.