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May 18, 2005 � Issue #220 | |
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Feature Article Time for A Self-Assessment, By Van K. Tharp, Ph.D.
Tax Tip Reporting Wash Sales on Your Taxes, By Stephen S. Meredith, CPA, PLLC
Listening In... Doubt About System Analyses
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Time for A Self-Assessment By Van K. Tharp, Ph.D. One of my primary roles as president of the International Institute of Trading Mastery, Inc is to be a coach for some of the best traders and investors in the world. And, just like any coach, my key focus is making sure that the people I am working with are following the fundamentals. In 2005, we are in the middle of a huge secular bear market. Late last year and early this year, it looked like we had nice trends in commodities and stocks that would reflect inflation. But if you were heavily invested in those, as a trend follower, you�ve probably lost a lot of money by now. These are very difficult markets, as are most bear markets, and you must be able to follow the fundamentals of your craft. With this key role in mind, I decided to develop a quick 15-point questionnaire so you can evaluate yourself. Take it yourself and pass it on to your friends � I�m sure you�ll all get some insights about your performance. Answer each question with a true or false answer. 1) I have a written business plan to guide my trading/investing. True / False 2) I have read Safe Strategies for Financial Freedom and keep up with Tharp�s Thoughts and I think I understand the big picture. True / False 3) I am totally responsible for my trading results and as a result I can continually correct my mistakes. (If part 2 is false, all of this is false). True / False 4) I can honestly say that I do a good job of letting my profits run and cutting my losses short. True / False 5) I have three trading strategies that I can use that fit the big picture. True / False. 6) For trading strategy one I have collected an R-multiple distribution of at least 50 trades (i.e., from historical data or live trading). True / False 7) For trading strategy two I have collected an R-multiple distribution of at least 50 trades (i.e., from historical data or live trading). True / False 8) For trading strategy three I have collected an R-multiple distribution of at least 50 trades (i.e., from historical data or live trading). True / False 9) For each of my trading strategies, I know the expectancy and the standard deviation of the distribution. True / False 10) I have clear objectives for my trading. I know what I can tolerate in terms of drawdowns and I know what I want to achieve this year. True / False 11) Based upon my objectives I have a clear position-sizing strategy to meet those objectives. True / False 12) I totally understand that I am the most important factor in my trading and I do more work on myself than any other aspect of my trading/investing. True / False. 13) I totally understand my psychological issues and I work on them regularly. True / False. 14) I do the ten-tasks of trading on a regular basis. True / False. 15) I would consider myself to be very disciplined as a trader /investor. True / False. Okay, now give yourself one point for each true answer. And be honest with yourself. Fill in your score here _______. Now let�s take a look at how you rate. 12 or more � You have the makings of a great trader / investor and you probably are doing very well in the market, even this market. 10 �11. You have a lot of potential, but you are probably making some major mistakes and for many of you, these may be psychological mistakes. 7 � 9. You are way above average, but you haven�t graduated to the big leagues yet. You are like a high school football star, trying to move to the NFL. 4 � 6. You are a better than the average investor on the street but you have a long way to go to hone your skills. You probably need to really work on yourself, on your discipline, and on your trading strategies. 3 or less. You represent the average trader / investor. You probably want someone to tell you exactly what to do and then you expect to make big profits now. And when it doesn�t happen, you look for a better advisor or guru to help you. Guess what? � it doesn�t work that way. If you at least answered true to question 12, then you have some potential and, if you are willing to commit yourself to excellence, you could move to the top of the scale in a few years. If you need help with business planning, we strongly recommend the business planning CD series. If you need help understanding why you are the most important factor in your trading, then we recommend the Peak Performance Home Study Course. And if you haven�t done this yet, we strongly recommend that you do it now. Stop trading and do the Peak Performance Home Study Course. And if you don�t understand strategies and expectancy, then we recommend that you do the Systems Development home study course, and we�re offering a special on this course in this issue of Tharp�s Thoughts.If you are not sure where to start and want a complete overview of the big picture, R-multiples, what to invest in, plus much more, our new course Make Money While You Sleep, goes on pre- sale today. It offers a well-rounded, comprehensive approach to get you headed in the direction that's just right for you.
Editors Note: Throughout the issues you will see certain words with odd spellings, such as Fre-edom and mort-gage. This is because spam filters are likely to block message that contain certain words and this is one solution.
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Tax Tip Reporting Wash Sales on Your Taxes A Follow-up From Last Week's Article By Stephen S. Meredith, CPA, PLLC Last week I wrote an article on how to calculate the adjusted basis of your stock after a wash sale [click here to read this with an introduction by Dr. Tharp on how this process can save you thousands]. Earlier this year I wrote an article on reporting your trades if you are an Investor, a Trader (without the election), or an Electing Trader [click here to read this article]. An alert reader of last week�s column wrote to me with a comment on the details about reporting wash sales and I thought I should clarify last week�s article. From last week�s article you know that the basis of your stock is increased by any loss you incur that is not deductible because of the wash sale rules. The final trade is reported with the net sales price and the adjusted (increased) basis. You also have to report the wash sales, even though they are not deductible. There is a reason the IRS wants this and the reason is because of the matching program that they run on the returns. The stock transactions reported on your 1099-B will include ALL sales, including wash sales. Since they are sending this information to the IRS you have to report ALL sales so that your tax return matches the brokers report. In other words, the total sales on your tax return have to be at least the same or higher as the total sales reported by the broker on the Form 1099-B. You don�t want to risk an IRS inquiry for an avoidable reason. The IRS computer matching program will catch you. The 2004 Instructions for Schedule D are fairly clear, though they leave out a few details, about computing basis and reporting sales. Page D-3 of the instructions discusses the wash sale rules including a note about increasing your basis by the amount of losses that are disallowed. The instructions also discuss in some detail how to report the sale of stocks that are considered wash sales. The instructions say to report the sale as if it were not a wash sale, thereby showing the loss on schedule D. Then on the very next line, enter the words �wash sale� in the description and put in a dollar amount for a sale price that is equal to the amount of the loss on the line above. Do not enter any amount in the box for your basis. That way each sale is reported, but the loss is offset by the wash sale transaction in the next line. In an interesting side note, this now means that the �total sales� you show on your tax return will be MORE than the amount of total sales reported by the broker on the Form 1099-B. That�s OK because the IRS will only generate automatic notices of problems on your return if the amount of sales you report are LESS than what is shown on the Form 1099-B. These instructions also have a good overview of the reporting requirements for Traders and Electing Traders. Traders report their sales on schedule D just like investors. Traders have the advantage of being able to deduct their expenses on schedule C. Electing Traders report all their trades on form 4797, line 10, and their business expenses on schedule C. Electing Traders can specify which brokerage account is for their trading business. Electing Traders may also hold some positions for long-term gains. The choice of whether you hold a stock for short-term trading or long-term gains must be made at the time the stock is first purchased. I highly recommend having a separate account if you chose to do this type of investing as well as being a Trader or Electing Trader. You cannot just move a stock from one account to the other and say that you have changed your mind about the stock and now want it to be a long term holding, or vice-versa. The instructions for schedule D make reference to Publication 550, Investment Income and Expenses. On page 53 of Pub 550 it discusses the holding period �tacking� that I wrote about last week when a wash sale occurs, although they do not mention the term �tacking�. On pages 56 and 57 of Pub 550 they cover in detail the wash sale rules and the reporting on your tax forms. It also discusses the purchase or sale of options and 1256 contracts and their reporting. This is fairly well written material and has some good examples to read through. Included in the examples are things like buying 100 shares one day, selling it the next day, and then buying 200 shares on the third day. This creates a partial wash sale and needs some special reporting. The opposite could also happen. You could own 100 shares for a year, buy another 100, and then sell 150 shares. This creates a special wash sale situation as well. You could have a gain on part of the sale and a loss on part of the sale. The bottom line is this; don�t always blindly follow the report from your brokerage firm. Your basis may be higher, making your taxes lower. It is up to you to keep track of the basis of each position you hold, including changes in basis due to wash sales or options trades. I suggest keeping a spreadsheet that is formatted in a similar pattern to the format of the tax return that you will file. That way you can keep track of you basis throughout the year and always know what the year-to-date gains and losses are for tax purposes. You will get the added benefit of having that information ready when it comes time to do your taxes. Don�t wait until April 1 and call your CPA with 500 trades to report and no organization to your data! It�s not fair to them, and if you are truly a trader and trying to make some profit, its not good business for you. I�m just finishing up my own web site and will soon have some of these spreadsheets available for you. Check with me at SteveMeredithPLLC.com in a few weeks. Stephen S. Meredith is a CPA in Richmond Virginia. He specializes in preparing income tax returns for all types of businesses, individuals, estates, and trusts. He also consults with new business owners on how to properly structure their business to get the maximum benefit from current tax laws. Steve deals with many stock market and real estate investors. He has clients nationwide and lectures regularly on tax topics. Contact [email protected] |
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Excerpts from Dr. Tharp's Mastermind Discussion Forum One Doubt About System
Analyses
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Feedback "Thank you very much for opening my eyes and those of my family and friends to the power of our being and the possibilities for our lives." --Ed Pomicter |