Will Turbo Tax work if I am a full time trader in commodities (self employed), formed a sole proprietorship LLC in May, and elected Mark to Market (IRC 475) accounting?

[GeoffreyG · Accepted solution]

Yes; TurboTax can certainly handle the type of return required for a self-employed commodities trader; but it will require a little bit of work and effort.

Essentially, after declaring yourself as a securities trader (if you objectively meet the criteria) you will then need to print and file your tax return on paper (not e-file) and attach a statement to the back of it declaring what is known as an IRC (Internal Revenue Code) Section 475(f) election.  Next, you will enter your business expenses as a securities trader on a Form 1040 Schedule C, inputting your expenses only and showing no income from this particular business activity (i.e., trading).  Finally, you will manually add a Form 4797 to your tax return, and enter your net total gain / loss in Part II of Form 4797, using the TurboTax smart worksheet.

Please note that you will want the TurboTax desktop software to correctly do this; the TurboTax online program will not be adequate, because you will not have access to the "Forms Mode" of the software.

Here is a link to an IRS.gov article that I think you should read first, before filing a tax return this way.  If the hyperlink is not clickable, then please simply cut-and-paste it into your internet browser:

https://www.irs.gov/taxtopics/tc429.html

Thank you for asking this important question, and good luck with your trading!

[GeoffreyG]

P.S.  A single-member LLC is typically ignored for income tax filing purposes . . . except, I believe, unless you live in California.  In that case, you would need to provide some extra information on your state of CA tax return.

[fbone]

Thanks for the explanation. Does this answer still apply for TT 2017 (i.e. print out and manually add the form) or is this now supported within the application and for e-filing? Thanks.

[Cobblestone1]

When filing as a TTS, as per instructions I put my expenses on shed. c and my net gain on form 6781. When I came to the section on taking home office expenses it would not let me proceed or take the expenses as the system only saw a loss on shed C.

Turbo Tax rep and then a CPA that they put me in-touch with were unable to find a solution. However, when I opened up form 8829, I found the answer.

On form 8829, expenses for business use of your home, go to line 8 and enter in the net gain after the loss from shed C. That then shows the system that you indeed have a gain on the business not just the loss as shown on shed. C. 

I hope this helps those of you that are going to run into this problem.

E

[ritz0786]

So it looks like to file section 475, we need to paper file, cannot e-file.

But is it possible that we e-file the tax return by itself, but then just send the section 475 statement separately in the mail? This statement would be an addition to the e-filed return. 

I believe there is an IRS form that allows you to send extra attachments / statements etc. as a followup to your filed return (dont remember the form for number).

We can send that form, and section 475 attachment with it. 

Wouldn't that suffice? Its easier to send 2 sheets, than filing the whole return on paper.

[eliemay]

I am not a profession tax preparer but have been fighting the Trader Tax Status battle for some time now.  First of all the Mark To Market 475(f) is very confusing and complex.  But most importantly it is only useful for someone who loses money.  I do day trading and virtually never lose money.  One reason is that I have lots of shares at a very wide range of cost basis and can always find a lot that is in profit.  It should also be noted that most brokerage accounting software packages cannot be trusted as they do not assign the lots accurately much less optimally.  This can create fictitious "wash sales".  I go into my account every night after the brokerage updates the database and I fix and optimize all lots in "Closed Unsettled Status".  In other words if my method is LIFO (Last In First Out) and I bought 100 shares at $92 and sold them the same day for $93, there are times when the brokerage finds a different lot at $91 for example and creates a "fictitious wash sale".  I check the sold lots and either make sure it is at the correct $92 cost basis or I might optimize if I find an available lot with a cost basis higher than $92 but less than $93.  The proceeds are the same but by using a higher cost basis I minimize my realized taxable gains.

Back to Trader Tax Status.  A few problems that arise are that the use of a Schedule C for benefitting from entitlement for using a Schedule C is that you have no income and TurboTax will not allow you to take any deductions like Home Office or anything else that requires gains to work against.  Also make sure that you do this correctly since security gains are not subject to self employment tax and have their own tax rate which most likely is less than convention earned income.  I would add that I wasted 45 minutes and $270 paying for a consultation with Robert Green and he refused to answer my key questions and instead went through his standard dog and pony show.  But he did mention that his technique is to use a "Transfer Method" to move gains from the Schedule D to the Schedule C to resolve the lack of gains there which messes up TurboTax in any computations that require a postive amount for the gains.  However he refused to answer the question of what form and line or how does one use his "Transfer Method".  So far I have not been able to find any reference anywhere as to how to do this and I fear that it would mess up the self employment tax and the proper capital gains tax computation.  In the end I have found a competent CPA who specialized in Trader Tax Status.  I am now working hard to organize all of the data to properly send to him.  It is extremely important to note that Trader Tax Status is the absolute best kept secret in the industry.  Also almost no broker, CPA, or tax lawyer has ever heard of it.  So if one is serious about TTS I strongly encourage you shop around for a CPA who specializes in TTS and absolutely very that he/she is a professional and actually knows TTS properly.  There is too much money at stake and chances of being audited if something goes wrong.  Also note that if you call the IRS and ask any question related to TTS they will hang up on you and you will never get an answer from them on anything related to TTS.

[Rick19744]

@ritz0786 

Comments related to your questions:

• The Section 475 election must be attached to your tax return; timely filed by the original due date or attached to an extension of time to file.
• The IRS form 8453 allows the filing of some items separate from the tax return, however, the Section 475 election is not one of those items.
• You also have to keep in mind that the Section 475 election is not for the return you are filing.  It is for the following tax year; so filing an election with your 2020 tax return is for the 2021 tax year.

[daboyzrule]

Am curious on the transfer strategy of moving partial gains or referencing gains from Sch. D to offset against Sch. C. I saw the YouTube videos from him and downloaded the guide but it is vague when it comes to this specific technique.

[lauriofam5]

elie, I found this post very informative and it is current!

Thanks for the detailed information. I am looking  to file mark to market form this year to use it for next year.

Did you do this part on your own? Or did your CPA file that form for you at the beginning? If so, did you use the CD version of TurboTax and paper file?

[lauriofam5]

Rick,

I was reading this thread and found your post (very helpful, thank you).

Can I follow these guidelines and still use Turbo Tax to paper file each year AFTER I have elected the market to market?

I have been using TT  (online or desktop version) every year and am hoping I can continue to do so next tax year with my new filing status. I am trying to avoid going to a CPA if at all possible, thanks.

[spencer00]

thx. how about without MTM election. you have to do advanced. please explain how to do this situation ? i guess you have to use sch c and D. still not entering income in business income?

[MarilynG1]

@spencer00 If you are not using the MTM election to report your income and expenses on Schedule C and Form 4797, then your gains/losses are reported on Schedule D as an investor. 

As a day trader without a Mark to Market election your losses are limited to $3,000 this year.  The balance is carried over as a capital loss, not a business loss.

See the detailed answer from @TurboTaxGeoffreyG above. 

Click this link for more discussion on Day Trading. 

[spencer00]

I knew those. 

[spencer00]

Please review my previous question- how to contribute Ira such as SEP  if no business income entered on Sch C ?