TradeLog version 20 introduces new file-specific wash sale settings, allowing a user to adjust from default methodology for wash sale calculations based on the taxpayer’s personal situation and trading strategies.
To adjust Wash Sale Settings, open your TradeLog file and go to the File menu, then choose Wash Sale Settings to open the dialog box.
It’s important to understand: changing these settings will alter taxable results and could have legal consequences. You should not arbitrarily change wash sale settings. We recommend consulting with a tax professional or doing careful research before changing from default settings. The following information should not be taken as tax or legal advice. You are responsible for the decisions you make.
Two general methods for wash sale treatment.
Over the past several decades there have generally been two very different methods for wash sale treatment, specifically in relation to option contracts. We will refer to these as Method 1 and Method 2:
Method 1 - Adjust for Wash Sales Between Trades with the Same Underlying Ticker
This method has been used by TradeLog for over 20 years, and continues to be our default recommended method.
With method 1, option contracts for the same underlying security are considered substantially identical, regardless of the strike price, expiration date, or type of contract. In addition, option contracts are considered substantially identical to shares of the underlying security.
To use Method 1, Wash Sale Settings in your TradeLog file should be as follows (this is the default TradeLog setup):
Method 2 - Adjust for Wash Sales Between Trades with Identical Ticker
For method 2, option contracts for the same underlying security are only considered substantially identical if the contract is the same type (Call or Put), has the same expiration date, and same strike price. In other words, the option ticker is identical. Shares of the underlying security are not considered substantially identical.
This method has been used by other trader tax reporting solutions for many years. In addition, brokers generally apply this same methodology when reporting on 1099-B.
To use Method 2, Wash Sale Settings in your TradeLog file should be as follows:
Frequently Asked Questions:
Why are there different methods?
There is room for interpretation in the tax law and IRS guidance. Specifically, in the definition of what is considered “substantially identical”.
A more conservative interpretation of the guidelines may conclude that any option contract on the same underlying security is a “contract or option so to acquire, substantially identical stock or securities” (IRC 1091(a)) - this results in Method 1.
On the other hand, some options traders may use strategies that generally treat options at different strike prices and expirations as separate and independent, and therefore not substantially identical - Method 2. Often such traders buy and sell option contracts with no intention to exercise/assign the contracts and acquire the underlying ticker.
If Method 2 is best for my situation, why use TradeLog instead of my 1099-B?
TradeLog will also adjust for wash sales across all brokerage accounts, including IRA wash sales. This is required by the IRS, but not accounted for on the 1099-B. TradeLog also attempts to make any wash sale adjustments starting 30 days before a loss, this can often avoid higher than necessary deferrals to the next tax year.
If I’ve used one wash sale method for the previous year, can I change my method for subsequent years?
You, the taxpayer, are responsible for your decisions. We generally recommend you consistently apply the same wash sale method each year. However, if you made changes to your overall trading strategies and the type of products you trade, it may be that a different method is appropriate. You should be prepared to explain why the change was made in your situation, especially if the change results in a decreased tax liability.
Other Wash Sale Settings
Other wash sale settings allow users to further customize the way wash sales are applied if necessary:
Adjust Wash Sales Between Shorts and Longs
Disabling this setting will cause TradeLog to not adjust wash sales between short and long positions.
| Example | If Enabled | If Disabled |
|
Sell stock short then buy to cover at a loss, then Buy shares of the same stock. |
Wash Sale | Not a Wash Sale |
By default, this setting is enabled - which we recommend.
Adjust Wash Sales from Stock to Option Positions
Disabling this setting will cause TradeLog to not treat option positions as possible replacements for a stock trade that closes at a loss.
| Example | If Enabled | If Disabled |
|
Sell stock at a loss, then Buy a CALL option for the same stock. |
Wash Sale | Not a Wash Sale |
By default, this setting is enabled - which we recommend.
Adjust Wash Sales from Options to Stock Positions
Disabling this setting will cause TradeLog to not treat stock positions as possible replacements for an option trade that closes at a loss.
| Example | If Enabled | If Disabled |
|
Buy CALL option and sell at a loss, then Buy shares of the underlying stock. |
Wash Sale | Not a Wash Sale |
By default, this setting is enabled - which we recommend.
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