Sign Up

Why sign in to the Community?

  • Submit a question
  • Check your notifications
or and start working on your taxes
cancel
Showing results for 
Search instead for 
Did you mean: 
Tbitts43
Level 1

Day Trading Losses with an LLC

I lost my job due to the pandemic, so I decided to try to learn to be a day trader. To start my endeavor, I withdrew 60k from my ROTH IRA to take advantage of the cares act 0% early withdraw penalty and ability to spread the income taxes to be paid on it over 3 years and I used about 40k from savings. 

 

I had significant realized losses (40k actually) that I want to treat as ordinary so that I can fully offset my unrealized gains with 2020's realized losses and not be penalized by the wash sale rule. I'm standing at about 7k total loss when you factor in unrealized profits due to investing in crypto. 

 

I did not elect 475 in 2020 or TTS, but I do qualify. However, I established an LLC in December of 2020 for the trading business.

 

What is the best way to not be disenfranchised from the wash-sale rule?

 

If I treat the loss as capital gains, it only wants to let me deduct around 20k of the 40k actual losses. 

1 Best answer

Accepted Solutions
Critter-3
Level 15

Day Trading Losses with an LLC

A single member LLC that has not made the election to be taxed as a corporation  is a disregarded entity so you still cannot do an end run around the sec 475 rules like you want to do.    I highly recommend you seek local professional assistance for guidance on what you can and cannot do so you don't mess things up going forward.  One thing you could have done is done the "day trading" in the ROTH to start with so you really need to get educated on what you are doing vs what you want to do.

View solution in original post

3 Replies
ColeenD3
Expert Alumni

Day Trading Losses with an LLC

You cant. You had to elect Section 475(f) in advance.

 

The Mark-to-Market Election

Traders can choose to use the mark-to-market rules, investors can't. If a trader doesn't make a valid mark-to-market election under section 475(f), then he or she must treat the gains and losses from sales of securities as capital gains and losses and report the sales on Form 1040, Schedule D (PDF), Capital Gains and Losses and on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets, as appropriate. When reporting on Schedule D, both the limitations on capital losses and the wash sales rules continue to apply. However, if a trader makes a timely mark-to-market election, then he or she can treat the gains and losses from sales of securities as ordinary gains and losses (except for securities held for investment - see above) that must be reported on Part II of Form 4797 (PDF), Sales of Business Property. Neither the limitations on capital losses nor the wash sale rules apply to traders using the mark-to-market method of accounting.

 

PUB 3115

The Mark-to-Market Election

A trader must make the mark-to-market election by the original due date (not including extensions) of the tax return for the year prior to the year for which the election becomes effective. You can make the election by attaching a statement either to your income tax return if filed without an extension or to a request for an extension of time to file your return. The statement should include the following information:

  1. That you're making an election under section 475(f);
  2. The first tax year for which the election is effective; and
  3. The trade or business for which you're making the election.

 

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
Tbitts43
Level 1

Day Trading Losses with an LLC

Thank you for the reply, but I felt like that focused on electing section 475 as a person. I established an LLC in December of 2020, and I wanted to know if I have to elect section 475 for my LLC specifically in order to claim ordinary losses or if I can record my costs and losses and not be disenfranchised by the wash-sale rule.

 

@ColeenD3 do you know by chance?

Critter-3
Level 15

Day Trading Losses with an LLC

A single member LLC that has not made the election to be taxed as a corporation  is a disregarded entity so you still cannot do an end run around the sec 475 rules like you want to do.    I highly recommend you seek local professional assistance for guidance on what you can and cannot do so you don't mess things up going forward.  One thing you could have done is done the "day trading" in the ROTH to start with so you really need to get educated on what you are doing vs what you want to do.

View solution in original post

Dynamic AdsDynamic Ads
v
Privacy Settings