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
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
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.
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.
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
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.
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.
Comments related to your questions:
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.
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?
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.
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?
@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.
Please review my previous question- how to contribute Ira such as SEP if no business income entered on Sch C ?
You can't contribute to a SEP without self-employment income. @spencer00
You only need to enter SEP IRA contributions made through self-employment work. If your employer made a SEP IRA contribution for you, then you don’t need to enter it in your return. (While you could contribute more to an employer-sponsored SEP IRA, TurboTax doesn’t support these contributions.)
Before you enter your SEP IRA contributions, first make sure you've entered self-employed income. This allows us to calculate the maximum amount you're allowed to contribute to your SEP IRA.
The contributions you make to each employee's SEP-IRA each year cannot exceed the lesser of:
Thank you for your reply. Where on turbo tax able enter self employed income ? As a full trader per Irs criteria, a trader is also entitled to set up a qualified retirement plan if the capital gain made . Problem here the gain entered Sch D. Not sure how to handle this issue. Thx
If you are a trader, and you have not made the Mark to Market election, you report your trades on Schedule D as you have indicated. But dividends and interest and other expenses of your business are reported on Schedule C. You are in the business of trading securities, so all business-related expenses and income are reported on your Schedule C. When you elect Mark to Market, you use Form 4797, Sale of Business Property and your gains become business income which counts toward SE income for the purposes of making SE retirement account contributions.
To create a Schedule C, use this link.
Your trading activity is still reported on Schedule D, so your SE retirement contributions and health insurance premiums deductions are dependent upon your SE income, which for a trader without a Mark to Market election is limited to dividend and interest income. If you had an S-corp, you could pay yourself a salary and use that earned income to contribute to a SE retirement plan. But with your gain income reported on Schedule D, the income cannot be considered self-employment income. @spencer00
@DawnC @spencer00 I guess I have the same question as @spencer00 : just trade tax status (TTS) but no MTM (Mark to Market). My question is that even though trading income is reported in sch D for TTS with NO MTM, there is NO reason for the IRA not to allow to enter the trading income in the trading business of sch C.
So again, for TTS with NO MTM
1). Is the restriction of only including dividend & interest in sch C. a restriction only by Turbotax, not really by IRS, correct?
2). Can I include some or all trading income from sch D to sch C so that I can have more SEP IRA, qualified business income deduction & even health insurance premium deduction? I don't mind paying more SEI (Self employment income) tax here. Again, I understand this might not be possible (or automatic) using Turbotax (even desktop), but maybe there is a way to simply 'move some trading income' to sch C manually in Turbotax desktop to do so? If there is one, anyone knows how?
Thanks and I'm pretty sure that's what @spencer00 and probably many are asking.
If you have TurboTax Live, you can use the Full Service offering to have your tax return prepared.
Please read more about it here.
Except I tried that and they weren't aware on how to file as a trader, nor elect section 475, nor deal with section 67e deductions. Plus they told me that I couldn't write off trade related expenses. So I had them cancel the live session and revert me back to the normal online session. When some one looks at your 1099b and says you have a 400k loss, you know you arent going to find the help you are searching for.
You can make an adjustment to your Schedule C income in order to take a home office deduction as long as you are using the desktop software, as you will need Forms mode for the manual entry.
If you have not elected and submitted the Mark-to-Market (MTM) accounting method, then go to Forms Mode to view your Schedule D. Line 16 of Schedule D will show the overall gain or loss being reported on your return. If you did not report any transactions during the year as an ‘investor’ and Schedule D shows only your gains/losses from being a ‘trader’, then line 16 is the amount you use in the home office instruction below. Otherwise, you must do some math outside of your return to determine only the overall gain/loss from transactions associated with your business as a ‘trader’. Transactions as an investor (for example, selling a long-term holding) cannot be considered to be income associated with your business as a trader.
For traders who claim a home office on their Schedule C, a manual adjustment must be made to show that the trader business had a gain for the year. Otherwise, the home office deduction is disallowed. Use the following steps to make that manual adjustment:
In Forms Mode, go to Form 8829
Scroll to the Line 8 Calculation Smart Worksheet
Enter the ‘trader’ gain amount (referenced in the instructions above) on line C2
From <Link to Annette's full instructions>
@JBJD
@largib
@spencer00
You seem really knowledgeable. I tried live again yesterday and they said they cant do it if there is more than 1 schedule C. Not sure if true, but looks like Im going to have to do this on my own. Do you know the process of filing as a trader who has not elected 475 yet?
Yes; TurboTax can certainly handle the type of return required for a self-employed commodities trader. 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 to add the 4797. Please review this IRS link for more information about this election.
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