Are there any tax advantages for futures traders that stock traders don’t get? They do, in fact. In this video, I speak with Dave Lerman, Director of Education at CME Group, about the tax advantages and efficiencies that futures traders enjoy.
When compared to stocks and ETFs, futures trading provides significant tax benefits to traders. Micro E-mini futures, in particular, offer a low-risk option to trade equities futures markets, allowing inexperienced traders to take advantage of the tax advantages that futures can bring.
1. The Benefits of Capital Gains. While short-term capital gains from stocks or ETFs are taxed at your ordinary income tax rate, futures are taxed according to the 60/40 rule: 60% of your short-term capital gains are taxed at the 15% long-term capital gains tax rate, while only 40% are taxed at your regular income tax rate. Profits from positions held for less than a year are classified as short-term capital gains, while profits from positions maintained for more than a year are classified as long-term capital gains. The following example shows two traders who each made $100 in capital gains. Trader A profited from short-term stock trading, whereas Trader B profited by day trading Micro E-mini futures. Trader A’s $100 profit is taxed at his standard income tax rate of 22%, leaving him with $78 after taxes. Only 40% of Trader B’s profits from futures trading are taxed at her regular income tax rate of 22%, while the remaining 60% is taxed at the long-term capital gains rate of 15%. After taxes, she has $82.20 in her pocket, a profit of over 5% more than Trader A.
2. Benefits of Capital Losses
Futures traders, like stock traders, can deduct up to $3,000 in capital losses from their yearly income if losses exceed gains for the year. The 60/40 rule, however, also applies to capital losses from futures trading. You can also utilize losses from futures trading to offset gains. In fact, you have up to three years to carry over losses to balance profits from past tax years.
3. Futures are not subject to the wash-sale rule.
The wash sale rule bars a trader from claiming losses on a stock if he repurchases the same stock within 30 days of taking the loss when trading stocks or ETFs. Active stock traders face a high tax burden as a result of this. The wash sale rule, on the other hand, does not apply to futures trading. For aggressive futures traders who buy and sell the same contract numerous times per day, this can be lucrative.
If you enjoyed this video here are more videos on the Benefits of Futures:
Past performance does not guarantee future outcomes. Anthony Crudele and his guests make no assurances about the outcome or profit. You should be aware that following any strategy or investment described on this website or on the show carries a genuine risk of loss. The price or value of the strategies or assets suggested may change. Investors may receive a lower return than they put in. It’s possible that the investments or tactics suggested on this website or on the show aren’t right for you. This information does not take into consideration your specific investing objectives, financial condition, or needs, and it is not intended to be personalized advice. You must make your own decisions about investments or techniques discussed on this website or on the show. You should evaluate whether the information on this website or on the show is appropriate for your specific circumstances before acting on it, and you should seriously consider receiving advice from your own financial or investment consultant.
Do index futures have wash sales?
Stocks, ETF shares, and equity options are all subject to wash sales laws. Cryptocurrencies and Section 1256 instruments (futures, options on futures, and broad-based index options/cash-settled index options) are exempt from the wash sale requirements.
Do various alternatives have different wash sales?
Though you repurchase the security in a different account, such as an IRA or Roth IRA, the IRS will consider the transaction a wash sale, even if the other account is in your spouse’s name. If you’re involved in a wash sale, you won’t be able to use any realized losses to offset capital gains for tax reasons. Instead, any unallowable loss from a wash sale is added to your account.
Is there a wash sale if you sell the full position?
This guideline also applies to a business that you own. As a result, you can’t have the corporation buy while you’re selling and yet deduct the loss.
You sell for a loss but re-buy in a retirement account
Within the 30-day timeframe, you cannot sell an asset for a loss in a taxable account and then repurchase the item in a retirement plan such as a 401(k) or an IRA and claim a loss in the taxable account.
Also, because tax losses cannot be claimed inside tax-advantaged retirement plans, other wash-sale regulations do not apply when trading within those funds.
Sell at year-end and re-buy when January starts
Tax-loss harvesting is a common tax-reduction strategy, but those who undertake it near the end of the year should pay special attention to this law. You only have till the end of the calendar year to get your portfolio in order to be compliant. As a result, you must complete wash sales by December 31 in order to claim any associated losses on your tax return for that year.
But don’t expect to be able to repurchase the asset within 30 days of the new year without breaking the law. Your stockbroker is keeping an eye on you, and the time between the end of the year and the filing deadline for your taxes allows your company plenty of time to appropriately report your account.
You buy the asset you want to sell less than 30 days before
Some investors may believe that they can reverse the order of a wash sale by purchasing more of the asset before selling it at a loss less than 30 days later. However, the IRS forbids this practice since you can’t buy 30 days before or after a sale and yet claim a loss.
Assume you have 100 shares of stock in which you have lost money. You buy another 100 shares knowing that you wish to sell your current position for a loss. Then you sell the original 100 shares for a loss less than 30 days later. Even though this was a wash sale, it still counts.
Day traders should pay special attention to wash-sale restrictions since they are more likely to run into them due to their frequent trading of securities.
Do bonds fall under the wash sale rule?
Selling assets at a loss to offset gains achieved throughout the year is a tried-and-true tax-saving method for investors. If you’ve made a lot of money this year, seek for unrealized losses in your portfolio and sell them before the end of the year to offset your gains. This could lower your tax bill in 2017.
But what if you expect a loss-making venture to not just recover but grow in the future? Or maybe you just want to keep the impact on your asset allocation to a minimum. You may believe that you can just sell the investment at a loss and then buy it again later. Not so fast: the wash selling rule must be observed.
The wash sale rule precludes you from losing money on a security if you buy a substantially identical security (or an option to buy one) within 30 days of selling the one that caused the loss. Only after you sell the new security can you acknowledge the loss.
Keep in mind that the regulation applies whether you repurchase the security in a regular or Roth IRA.
Fortunately, there are ways to get around the wash sale requirement while still accomplishing your objectives:
- Sell the security and buy shares of a different firm in the same industry or a mutual fund that owns securities similar to the ones you sold right away.
- Purchase more shares of the security equal to the amount you wish to sell at a loss before selling it. Then sell the original portion after 31 days.
If you have a bond that would yield a loss if sold, you can conduct a bond swap, in which you sell one asset, suffer a loss, and instantly buy another bond from a different issuer of equivalent quality and term. Because the bonds aren’t regarded substantially identical, the wash sale rule doesn’t apply in most cases. As a result, you can receive a tax benefit with little or no change in your financial situation.
Do day traders have to follow the wash sale rule?
What this means for stock and options traders is that if you sell a stock or an option at a loss and then buy it back at a profit, whether the option is the same month and strike price or not, you have a wash sale. The same is true if you sell an option for a loss and then buy the identical underlying stock during the next 30 days.
The tax code is silent on how far “in or out of the money” the option is, or what month and year it expires. As a result, TradeLog simply follows this rule: The option is “basically” the same if the underlying stock is the same. See our website for more information.
Below is a chart of Wash Sale Triggers.
Brokers do not make these modifications to your 1099-B since there are risks involved.
Brokers are subject to different rules than taxpayers.
Wash Sales in an IRA
Active traders and investors who keep an individual retirement account (IRA) in addition to a trading account are subject to special IRS wash sale requirements. These unique rules might have serious ramifications for aggressive traders and investors.
When an IRA trade triggers a wash sell, the loss in your taxable account is permanently disallowed.
There are no filing requirements for gains and losses realized in an IRA, and wash sale adjustments made within the IRA account are not required. If you have a taxable trading account as well as an IRA or Roth IRA, you must account for wash sales that occur as a result of trading in all of your accounts, including the IRA.
Notice the fourth scenario (IRS Publication 550, page 59) where a wash sale occurs:
Are wash sales prohibited?
It should be stated that making a wash sale is not unlawful. However, claiming an erroneous tax benefit is against the law.
The wash sale rule does not imply that you will lose all of your potential worth by losing money. Assume you have 100 Microsoft shares that you purchased at a price of $35. The current market price for this item is $25.
You decide to sell your shares for $2500 on June 1st, resulting in a $1,000 loss. By June 21, you understand that you should have kept your shares and purchased 100 for $27 each, totaling $2,700.
The initial $1,000 loss is not refunded. In reality, it’s just added to the cost basis of the shares you bought to replace the ones you sold. As a result, your cost basis for the 100 Microsoft shares is $3,700, which includes the $2,700 you paid to repurchase the shares and the $1,000 loss. Because the share price is $27 and your cost basis is $37 a share, you are still holding this extremely valuable loss. If you liquidate your position in the future, the loss will reduce any gains on your freshly repurchased shares or raise losses.
What are some ways to get around the wash sale rule?
It is possible to avoid wash sales while still benefiting from taxable profits and losses. If you hold an individual stock that has lost money, you can avoid a wash sale by purchasing more stock and waiting 31 days to sell the shares that have lost money. This technique has the ability to enhance your market exposure to a specific industry, which could potentially raise your risk.
What is the penalty for a stock wash sale?
The wash-sale rule bans selling an investment at a loss and replacing it 30 days later with the same or a “substantially identical” investment. If you have a wash sale, the IRS will not allow you to deduct the investment loss, thereby increasing your taxes for the year.