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Can a State Deny Trader Tax Status? I'm under audit in NYS.

Technical topics regarding tax preparation.
#1
iDred  
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This is specifically for NYS. In 2018 I made the sec 475 election with the IRS, which is basically trader tax status on my federal return.
I did this for a huge trading loss in 2018, and since I felt like I met the requirements as a trader I elected the trader tax status (sec 475 election)to be able to use my losses against W2 income. I have a $500,000 NOL from that year.

The IRS has not given me any issues yet about me making this election or using my NOL in 2019 and 2020.

However, I just got notified that for my NYS 2020 return, NYS is requesting information about my losses and has not issued the refund. I'm in audit status on their webpage. I won't know for another week exactly what they are requesting about my losses.

My question is, could NYS decide to say I can't use the Trader Tax Status from 2018, if the IRS has not revoked this status or questioned me about it?

Should I worry about defending my Trader Tax Status to NYS?

Do you think NYS is most likely requesting my individual stock transactions? They have never bothered me before about this and I have always combined them together in the past.

I have not listed my individual stock transactions on my return. For simplicity I lumped them together, and it is possible they may want all my individual trades. Which is fine, because I can just send them the detailed stock transactions.

Thanks, I'm just a little worried about being under audit here as I never have been before. I also have this sec 475 election and am worried about defending if I'm a trader or just an investor. I am also not sure if trader status is decided with the IRS or can a state decide If I'm a trader or not.
 

#2
Nilodop  
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Surely NYS can audit anything on your return, unconstrained by what IRS does or does not do.

And they can tell IRS what they find.
Tax Law prohibits us from disclosing information obtained from a tax return, or during an audit, to any unauthorized person. The Tax Law, however, does permit us to share your tax information with the Internal Revenue Service (IRS) and other government agencies, within defined standards of secrecy and reciprocity.
https://www.tax.ny.gov/pdf/publications ... ub130d.pdf. And IRS can decide what, if anything, they do.

But if you're asking whether NYS might have different rules defining trader status, I've no idea.
 

#3
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To clarify, did you make the 2018 trader status election in 2018 when filing the 2017 return? If so, great.

But next question is when you filed the 4797 showing the losses, did you use the broker's 1099B information with the wash sale adjustments, or did you use the actual sales and purchase information which would not adjust for wash sales? The reason I ask is I have seen some who take the 1099B transactions, then make another adjustment for the wash sales without realizing that the broker has added that amount to the basis of subsequent transactions. If I use the broker's basis and also adjust again for the wash sales, I have essentially deducted the amount twice.

You just want to be sure you are using correct basis for all transactions in the end. I had this recently and had to show the trader why his losses were not as much as he thought they s/be. Once he looked at the actual transactions and we made whatever adjustments we needed for the end of year transactions that had not cleared yet, we could balance everything back to the figures on the tax return.
 

#4
iDred  
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Yellowdog: yes very good point and luckily for me at the time, because I'm not sure if I would have messed this up, what I did with my brokerage account was I calculated the exact dollar amount I had at the beginning of the year and at the end of the year. So I knew exactly my profit/loss based on my account value which showed me that something didn't make sense with the was sales.

What I have been doing is at January 1st each year I write down how much my account value is, say starting Jan 1st at $100,000, then at December 31st I check my account value and say its $140,000. I then know my mark to market gain/loss should be exactly around $40,000. This is because your account value net liquidity is basically a mark to market each second.
This value seems to always equals your gain/losses on your 1099 when you add back the wash sales number and adjust mark to market.
 

#5
iDred  
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I finally got my audit letter from NYS: This is what they are requesting:

We require additional information regarding the following item(s) reported on your return:
Net Operating Loss
It is important that you respond to this letter. If you do not respond within 45 days from the date of this notice, we will
adjust your return which may result in an adjusted refund, refund denial or a bill.
Please send us the following information:
– A detailed explanation regarding the origin of the Net Operating Loss (NOL) reported on your return.
– Copies of supporting records to show the source of the original loss. Examples of acceptable documentation include
but are not limited to: copies of form(s) K-1 to show loss amounts acquired from a separate entity, copies of insurance
claims with proof of property basis to show casualty theft/loss, copies of closing statements to show disposition of real
property.
– A copy of the origin year return along with copies of your NOL computation worksheets to show how you claimed and
calculated the carryover use of the NOL.



I know my losses are legit and all my trades were short term. This means, unless they deny me my trading status, which they seem they are not questioning here, then I should be OK.

Would anyone happen to know the best way to send them my trading losses? Should I just send them a copy of my 1099 brokerage statements? I mean, if they see my actual brokerage statements they will see the gain/loss right on there as most of my trades cost basis was not reported to the IRS. The brokerage statement lists this gain/loss as they calculate it for you and that includes the "basis not reported to the IRS".


I didn't actually record my stock transactions in a spread sheet, but I believe the brokerage keeps each trade saved and I could download that as a PDF. Should I send that instead or both?

Thanks for any advice here.
 

#6
keiser  
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TDAmeritrade provides comprehensive documentation.
I assumed all major brokers do likewise.
Who is your broker?
 

#7
iDred  
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I'm using TDAmeritrade but what exactly do you think I should give them?

I have my 1099 brokerage statement that lists gains/losses and lots of stock transactions, 18 pages of them for just 2 months of trading and then my trading stopped as I blew up my account.

Do I need to fill out on a spreadsheet each individual stock transaction?

Can I just copy my 18 page 1099, with the summary of my gains and losses, and the 18 pages of what my brokerage has as my individual stock transactions?

I'm just really not sure what to send them here as I've heard different things.
 

#8
skassel  
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I would provide all of the pages for the entire year. So what if 18 pages is only 2 months. I assume 12 months will be roughly 108 pages. It's simply printing and mailing.
Steve Kassel, EA
 

#9
iDred  
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skassel wrote:I would provide all of the pages for the entire year. So what if 18 pages is only 2 months. I assume 12 months will be roughly 108 pages. It's simply printing and mailing.


Thanks for the reply.

Just to be sure here, the consolidated 1099 statement that the brokerages normally send. This includes the 1099 summary at the beginning, this has all the tax information on it summarized at the top, showing my gains/losses for short term and long term transactions.

This 1099 statement also includes many pages of individual stock transactions that add up to these numbers.

Basically, I should just send them the whole brokerage statement that they sent me? To me this makes sense as it has everything on it, including cost basis that was not sent to the IRS.
 

#10
keiser  
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My TDAmeritrade 1009 is 28 pages long and would seem comprehensive.
You could also export the data from GainsKeeper but I would think the 1099 has all the information neded.
 

#11
iDred  
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keiser wrote:My TDAmeritrade 1009 is 28 pages long and would seem comprehensive.
You could also export the data from GainsKeeper but I would think the 1099 has all the information neded.


Yes, I will try that first and send them the 1099.

Do you know how difficult the auditors will make this for me? Will they try hard to make it as difficult as possible for me because possibly the auditors get rewarded by making me have to pay money?

Or do they probably want to see me prevail here and just want to see something to justify the $500,000+ NOL that I took that year? Kind of like, I work for the state, and I want people to not have to pay taxes if they can just give me something to justify their claim, because its not coming out of my pocket so I don't care.

I'm not sure how these auditors work and how difficult they will be. I do have legitimate losses, and even a 1099-C for cancellation of debt as I had to do a settlement agreement with TD-Ameritrade. I also have a K-1 linked to the main stock I lost money on that has a $400,000 loss.

I'm hoping they just want to see something and they are not rewarded for bringing in money to the state. I have a feeling they are going to make this difficult for me but I've got the time, the trading knowledge, I am also a CPA but have not worked in the field for many years, so I'm going to put all the time into this as I can to prevail here and have somewhat experience and education to fight this to the very end, plus appealing any decisions they take on me and bringing it to court.

I'm just really worried they will say a 1099 and printouts of my transactions from TDAmeritrade are not good enough. If I lose my trader status and NOL, I'll live with that, but I'm making big gains right now trading and I don't want to lose $500,000 of capital loss carryforwards.
 

#12
Nilodop  
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#13
iDred  
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Probably right, I made sure that all my losses were 100% accurate in anticipation of getting audited. I figured they would audit me because of my $500,000+ NOL and figured they would look over everything very closely.

This is my first audit so I'm just worried of the unknown.

I'll get some good experience out of this in case I have to ever go back to a normal job again.
 

#14
iDred  
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Yellowdog wrote:To clarify, did you make the 2018 trader status election in 2018 when filing the 2017 return? If so, great.

But next question is when you filed the 4797 showing the losses, did you use the broker's 1099B information with the wash sale adjustments, or did you use the actual sales and purchase information which would not adjust for wash sales? The reason I ask is I have seen some who take the 1099B transactions, then make another adjustment for the wash sales without realizing that the broker has added that amount to the basis of subsequent transactions. If I use the broker's basis and also adjust again for the wash sales, I have essentially deducted the amount twice.

You just want to be sure you are using correct basis for all transactions in the end. I had this recently and had to show the trader why his losses were not as much as he thought they s/be. Once he looked at the actual transactions and we made whatever adjustments we needed for the end of year transactions that had not cleared yet, we could balance everything back to the figures on the tax return.


Oh boy, I made this mistake on my 2018 tax return. I believe in 2018 I was very new to all of this and was not sure what to do so erred on the side of caution on my part and used the higher loss amount.

Basically, I didn't deduct 12K of wash sales from my cost basis, giving me an extra 12K of NOL.

Since I still have a 300K+ NOL carry forward, and it didn't make any tax difference yet, will I be in big trouble when NYS sees this error?

luckily I kept track of my gains/losses for the year after 2018, and I did my 2019 & 2020 return correctly.

What should I do about this error? Should I just do nothing and see if they catch it or should I correct it? They are asking for my 2018 federal return which has this blatant error on it. I have just 45 days to answer NYS auditors and I'm not sure if I should go and amend my 2018 federal return before responding to them.
 

#15
iDred  
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Just to give an update on this, NYS finally got back to me and accepted the NOL and didn't say anything about me claiming trader tax status or the section 475 election I made. So the audit went well for me.

They also didn't say anything about the mistake I made not deducting the wash sales properly.

They did reduce my NOL from 100% to 80%, but they are correct because they never accepted the federal cares act changes and it says that right on their webpage.

Would anyone know if this means the IRS will not audit me also? Does NYC share its audits with the federal, I think I heard that states share information with the IRS.
 

#16
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Some states share info w/ the feds but if they only made state related changes, the irs won't change your fed return based on their findings.
 


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