Search This Blog

Tuesday, January 5, 2010

The Waiting Begins ...

That time of year has once again arrived ...

We begin to look ahead to tax time. Personally, I like to get my taxes done as soon as humanly possible.

Unfortunately, I'm a trader and investor.

Regardless of what any of us do for a living, we all have to wait for the tax documents to be shipped out by the responsible parties, which usually begins on January 31st. But investors and traders have a worse time of it than most folks. Because we have to wait for all of our brokers (and if you've been doing this for a while, there is this tendency to have quite a few brokers, which I do) to get all of our tax statements to us.

And it's not enough to have to wait for a myriad tax documents from different brokers. Usually the I.R.S. gives brokers longer to get tax documents out, than say, your regular corporate employer. In other words, if you work for an employer, then that employer must have your tax documents in the mail by January 31st. Not so with brokers. Your brokers are generally given more time. And even when they get you your tax documents? There's no telling that those are really your tax documents.

Because the number of times that I receive "corrections" to my statements weeks later? It's probably more often than I've received the actual, correct tax document the first time.

All of the above relates to a question I often receive on the part of new traders and new investors ...

"What do I need to 'do' for tax time?"

Biggest thing I can say after doing this for nearly 14 years?

Records. Keep excellent records.

If you keep up with it every single day? Then it's not hard to do. Again, I can't advise, as this is just a blog, and "I'm just a guy". But as a trader and investor of my own funds, this is what I've found I must keep track of ... every .... single ... day.
  • Date - There will be a portion of the taxes that you have to list every single trade and / or investment that you have made, and you'll thus need the date of each trade and / or investment.
  • Capital Description - Was it a trade? Was it an investment? Was it a dividend? I also write what I was trading or investing in this column. So I'll write things like "Div - JNJ" for Dividend, Johnson & Johnson. Or "Long 3 OJ" for going long in the OJ market.
  • Broker - I've just discovered that for my own record keeping? It's beneficial to keep track of which broker I made the transaction
  • Action - Was it a trade? Was it a trade buy to open? Was it a sell to close? Was it a sell to open (a short trade)? Was it a dividend received? I'll just write out things like "Buy - Trade to Open" or "Dividend" or "Exited investment".
  • DRIP (Dividend ReInvestment) Yes or No?
  • Shares or Number of Contracts: If I received a dividend, inside of a DRIP, I'll typically write something along the lines of "18.3845 shares @ $42.38495". In other words, this let's me know how many more shares I received, and at what price the DRIP was purchased. Trust me, when you finally sell off the investment for a profit? You need every single DRIP recorded for tax reasons. If it was a dividend, but there was no DRIP, I don't put anything in this column. If it was a futures contract, then I'll just write in the number of contracts, and the price I was filled, such as "3 at $13.51". If it was an equity trade, then I'll write the number of shares, and at what price I was filled, in other words, like "4000 shares at $18.50"
  • Amount: How much of the capital was spent? If I'm initiating a trade in futures? I write nothing in this column. If I'm closing a trade, then I write out the amount of the profit, or the loss in this column. If it's a dividend, then I write out how much the dividend (even if it was in a DRIP) the dividend was for all the shares.
  • Commission: I record the amount here, it it applies.
Just a simple spreadsheet for each transaction. It's not too hard.

The main thing is keeping up on the recordkeeping. I've discovered (the hard way of course), that if you let it get it away from you, then it can take a long time to catch up. Because the IRS demands that you list every single trade you make. It doesn't matter if you're a daytrader, and you have 2000 trades in a year. You must list them.

* * *

Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have over 13 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.

Search Investing and Trading Articles and Products