[dcolkitt]

One of the underlying problems is that the capital gains tax code itself is designed for a world from a pre-financialized, pre-electronic world from the 1950s. The idea that someone might trade in and out of positions within milliseconds, possibly using complex derivatives or sophisticated leveraged is completely absent from the code. There's nothing in the code that addresses even how to treat trades that are done in the same day. Wash sale rules are literally non-determinable for high frequency traders. There's no guidance whatsoever on when and how derivatives are rolled against the a position in the underlying.

I run a HFT operation, and just computing my US tax returns required thousands of lines of code of custom software. And then to actually file it, I print off a PDF, thousands of pages long of each and every individual trade. Not a CSV, not a data file, literally a printout. As if some IRS accountant is going to manually go through millions of rows line by line with an adding machine.

[bequanna]

Ha, I always wondered what HFT tax returns looked like.

Of course, the IRS cannot and will not check every transaction. But I do wonder if they actually verify some subset of the reported transactions, or would this only happen in an audit?

[dcolkitt]

Luckily, never had to go through an audit yet. But spot checking a subset of transactions isn’t actually workable. Because of the wash sale rule, the adjusted basis on any single transaction is path dependent on both the previous and future trades in that symbol.