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I day trade options and I understand that wash sales at the end of the year can really screw you.

I have not traded any position in 2021 that I traded in the last 40 days of 2020 in either my day trading or long term account.

However, I got my consolidated 1099 this week and it shows that I have a LOT of wash sales that are being reported to the IRS. Is that because 30 days hasn’t passed so its still showing them or is it because my last trades had wash sales and I have to prove to the IRS I didn’t repurchase the company in 2021?

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Just for the sake of accuracy, a wash sale occurs if you acquire a substantially identical security within 30 days before or 30 days after a realized loss.

If you incur a wash sale, the loss must be deferred and is added to the cost basis of the replacement shares (or options). If you close all positions by the end of the year then you get to claim your losses in that year (with no repurchase within 30 days in January).

What this means is that your tax accounting will be different than your actual gains and loss per trade but in the end, the total P&L will be the same.

Having a lot of wash sales consolidated 1099 form is meaningless. That's just the accounting of it all. It's only a problem if a wash sales is disallowed and you do not close the loss adjusted position by the end of the year. Then, you do not get to claim your initial realized loss in the year that it was incurred. You can determine that by reconciling your statement numbers. For example, if you made $30k from trading and your statement says $100k of gains with $70k of wash sales but there were no carry forwards, your taxable gain would be $30k. If your taxable gain was more than $30k, look for a disallowed (deferred) loss.

You do not have to prove anything to the IRS unless you broker makes a reporting error. IOW, If you do not repurchase the company in 2021 then the IRS will have no reason to disallow any December 2020 losses, assuming that all adjusted positions were closed in 2020.

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  • Thank you thats what I was thinking but when I got my consolidated 1099 from TD with 1.5million in wash sales I had a heart attack because I closed everything in 2020 and haven’t purchased any of it in 2021. – Aaron Meadows Jan 21 at 0:50
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    I feel your pain but not as severely. About 20 years ago, before understanding this, the first time that I got an 8949 form with a 6 figure disallowed loss, I nearly dropped a brick. I couldn't fathom how that could possibly be and what I would have to sell to raise the cash. The next panic was that because I didn't have trader tax status, I wondered how many years it would take to work off the losses. LOL. No need to pay for a stress test when the market does it for free :->) – Bob Baerker Jan 21 at 2:36
  • Yeah i created a scorp to trade from this year thats mark to market status. Seeing how that goes before I try personally electing mark to market. – Aaron Meadows Jan 21 at 5:47

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