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Interactive Brokers presents

U.S. Tax Reporting for Stocks and Options

Nancy A. Nelson CPA nnelson@interactivebrokers.com

Webinar begins @ 4:00pm EDT

Member SIPC www.sipc.org

webinars@interactivebrokers.com www.ibkr.com/webinars

Introduction

U. S. Tax Federal Tax focus Individual Income Taxes Partnership Trusts

Circular 230 Notice

The information in this presentation is provided for informational purposes only, and does not constitute tax advice and cannot be used by the recipient or any other taxpayer to avoid penalties under any federal, state, local or other tax statutes or regulations, or to resolve any tax issue.

Taxes are Individual

Age State residency Current employment and future prospects Family (children, education needs) Health Employee benefits (401K, pension)

Current Tax Code Status

No tax bills in Congress currently But remember it doesn’t take a tax bill to

impose tax (Affordable Care Act) What is likely before adjournment?

Current Law

Base is 1954 code with major revisions in 1979, 1984, and 2001 More recent tax changes (2001, 2011, 2012) have been temporary in nature requiring periodic action by Congress to extend

Current Law

2001 Bush tax changes Cut taxes Lower Ordinary rate brackets (top rate 35.6%) Lower Long- term Capital Gain Rate (0%, 15%) Established qualified dividends as a income class

Moved to eliminate the Marriage Penalty Child credits/education credits 10 Year life

What Happened?

Short answers are: Politics Economics Congressional discord After 10 years the Bush changes were extended

for 2 more years (2010 and 2011)

What Happened Last minute 2012 (12/28 signed into law 1/2/13) decision making: Indexed AMT Threshold Raised tax rates creating a top bracket of

39.6% (effective 2013) Created a bracketed Long term capital gains tax of 0%,15% and 20% (2013) Allowed some Bush provisions to expire, notably the

limitation on personal exemptions and itemized deductions

2014 tax brackets

10% - Less than $9,075 or $18,150 15% - Less than $36,900 or $73,800 25% - Less than $89,350 or $148,850 28% - Less than $186,350 or $226,850 33% - Less than $405,100 35% - Less than $406,750 or $457,600 39.6% Over $406,750 or $457,600 Long term capital gains/qualified dividends: 0, 15% 20%

Bringing back the Marriage Penalty

Elimination of personal exemptions: Reduced beginning at AGI of $254,200 or

$279,650 Loss of Itemized deductions: 3% of amount of AGI above.

Other Taxes Impacting Investors

Net Investment Income Tax: 3.8% of investment income for taxpayers with

AGI over $200,000 or $250,000 Remember this is NOT an indexed amount.

Ordinary vs. Qualified Dividends

What is a Qualified Dividend: A dividend paid from a U.S. Security or a Foreign Security where the

company is located in a country with which the U.S. has a tax treaty and that security is traded on a US exchange.

To qualify for lower rate – you must be LONG the position in your

account for 61 days around the record date. Taxed as Long – term Capital Gain

Payments in Lieu

A payment received instead of (in lieu of) a interest or dividend payment when you are long the security and your position has been lent

Payments in lieu are ordinary income and are NOT in general eligible for

lower qualified dividend rates. Payments in lieu are subject to Net Investment Income Tax

Payment in Lieu Paid

Borrowers of securities make payments in lieu to the lenders. Payments in lieu paid are investment interest subject to the

investment interest and itemized deduction limitations Allowable investment interest reduce net investment income.

Securities Transactions

Publication 550 is a valuable resource Free at IRS.Gov and updated annually Determining short-term vs. long–term Short-term transactions – ordinary income rates Long – term transactions – Long term capital gain rates Must hold position long 1 year and 1 day All short sales are short term, long purchase determines the

state of the holding period.

What are Tax Lots?

Each purchase of a security creates a tax lot. Each short sale of a security creates a tax lot.

Example: Buy 100 sh. XYZ at $14 on 1/15 Buy 100 sh. XYX at $16 on 1/20 Buy 100 sh. XYZ at $12 on 1/22

3 tax lots

Sales methods

Tax Code: FIFO – first in, first out Specific Identification Average Cost

Average Cost

Not effective for individual securities unless they are part of a dividend reinvestment plan or DRIP

Can be used for Mutual Funds

Example – FIFO

Sell all 300 shares 1/17/ +1 at $20/share Lot 1: Long – term Capital Gain - $600 Lot 2: Short –term Capital Gain - $400 Lot 3: Short – term Capital Gain $800

Using Specific Identification

Example: Sell 100 sh. XYZ and Maximize Loss sale price per share $10 Sell lot 2 to achieve a $600 capital loss How? Use tax optimizer to indicate on the day of

trade the lot you wish to sell

Using Macros to Mimic Specific Identification

IB has several Macros that can be used to execute trades:

Maximize Short –term loss LIFO – last in, first out Minimize Short – term gain Highest cost Minimize Long – term loss Minimize Long – term gain

Remember, short offsets short and then long against long and finally short against long when tax is calculated. Using a Short term loss to offset a long-term gain is less tax efficient.

Options

Tax News: Option trades became covered securities on 1/1/14 and will now be reported on form 1099B

Options

Cost of a call option adds to the cost basis of the security when executed.

Cost of a put option is cost basis against the sale When options are simply closed gain or loss is

recognized.

Index Options and Section 1256

Index option and Index options only (not single stock futures, not currency unless an currency index option).

Special treatment under the tax code: All are considered settled (sold) at 12/31 each year.

Any realized or unrealized gain or loss is recognized. Taxed at special rate: 40% as if short-term capital gain 60% as if long–term capital gain

Year end tax reporting

Consolidated 1099 on or about 2/15 Form 8949 (capital gains) Worksheet Dividend report

Disclosures

Options involve risk and are not suitable for all investors. For information on the uses and risks of options, you can obtain a copy of the Options Clearing Corporation risk disclosure document titled Characteristics and Risks of Standardized Options by visiting Interactivebrokers.com.

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. For a copy visit interactivebrokers.com.

Security futures involve a high degree of risk and are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading security futures, please read the Security Futures Risk Disclosure Statement. For a copy visit Interactivebrokers.com.

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

The Order types available through Interactive Brokers LLC’s Trader Workstation are designed to help you limit your loss and/or lock in a profit. Market conditions and other factors may affect execution. In general, orders guarantee a fill or guarantee a price, but not both. In extreme market conditions, an order may either be executed at a different price than anticipated or may not be filled in the marketplace.

There is a substantial risk of loss in trading futures and options. Past performance is not indicative of future results.

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Interactive Brokers LLC is a member of NYSE FINRA SIPC

Interactive Brokers LLC is registered with HKSFC and is a participant of the Sydney Futures Exchange (SFE)

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