TurboTax Desktop Bug: Federal Form 4797 MTM Losses Incorrectly Capped on MA Schedule B Instead of Flowing to Form 1 Line 6

Forum|Forum|3 months ago
April 10, 2026
1 reply
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Issue Description:
I am a self-employed consultant and a Section 475(f) Mark-to-Market (MTM) Trader. In the Federal section, my trading losses are correctly reported on Form 4797 as Ordinary Losses, which correctly offset my other business income without the $3,000 capital loss limitation.

However, the data flow to the Massachusetts (MA) State Return is broken. TurboTax is automatically pulling my Form 4797 loss into the MA Schedule B "Smart Worksheet for Line 17."

The Error:
By placing this MTM loss on the MA Schedule B, the software treats it as a Capital Loss, which is subject to the $2,000 state limitation against Part A income (Interest/Dividends).

The Correct Treatment:
Under Massachusetts law (M.G.L. c. 62), Section 475(f) MTM gains and losses are Ordinary Business Income/Losses. Because this is "Trade or Business" income, the full loss should flow to MA Form 1, Line 6 (or the Business Income Worksheet) to offset other Part B business income (like my Schedule C consulting profit).

Impact:
Because the loss is stuck on Schedule B, it is not offsetting my other business income on Line 6. This is resulting in a significant overpayment of state tax (5% of the unrecognized loss).

Requested Action:

Please provide a workaround to "force" the MTM Ordinary Loss from Federal 4797 to Line 6 of MA Form 1.
Fix the mapping logic so that Form 4797 losses designated as "Trader" or "Section 475" do not default to the capped Schedule B.

Product Info: TurboTax Home & Business 2025 (Desktop Edition)
State: Massachusetts

TurboTax Business Windows

Best answer by maglib

Mass instructions see Page 11-12

There is NOTHING within Mass directives nor instructions allowing MTM for Personal tax returns.

You are correct for IRS definitions of trader/ business can be seen in TC429

Non-Conformity: MA does not automatically adopt the federal section 475(f) MTM election.
Reporting Differences: While federal returns report MTM on Form 4797, Massachusetts generally treats securities as capital assets, meaning traders may need to reconcile this difference on their Massachusetts tax filing, treating losses as capital losses rather than ordinary losses.
Trader Status Definition: Similar to federal rules, Massachusetts evaluates if taxpayers are active traders (seeking profit from daily market movements with substantial activity) or investors.
Capital Gains Tax: Massachusetts taxes capital gains based on holding periods, often at a flat rate, regardless of the MTM election used on the federal return.
Trader vs. Investor Status in Massachusetts for EXPENSES:
- Trader (Business): Engaged in trading with "continuity, regularity, and frequency". According to a 2011 JD Supra article, a trader focuses on short-term market movements.
  - Investor: Focuses on long-term capital appreciation, dividends, or interest.
  - Key Distinction: The 2011 Lexology Mass Report notes that Massachusetts tax authorities consider whether a fund is "seeking to profit from daily market movements" (trader) versus holding for investment.
  - Tax Implications: As detailed in this KPMG Investor vs Trader traders may deduct expenses under IRC § 162, while investors are limited to IRC § 212 deductions.

maglib

Level 11

@likesky1010 Massachusetts generally does not recognize the federal Section 475(f) Mark to market election for state income tax purposes. While federal rules allow traders to treat gains/losses as ordinary, Massachusetts typically treats trading gains/losses as capital gains/losses, subject to capital loss limitations, as the state code is not fully linked to current federal trader tax rules. https://www.mass.gov/info-details/differences-between-ma-and-federal-tax-law-for-personal-income#:~:text=For%20personal%20income%20tax%20purposes,IRC%20as%20currently%20in%20effect.

Income items included in both Massachusetts and federal taxable income but with differences:

Capital Gains Massachusetts taxes most long-term gains at 5% and taxes long-term gains from the sale or exchange of collectibles at 12% (subject to a 50% deduction). For tax years ending on or before December 31, 2022, short-term gains were taxed at 12%. For tax years beginning on or after January 1, 2023, the tax rate on short-term gains from the sale or exchange of capital assets is 8.5%. The federal rate on capital gains varies.
Capital Losses can be applied against gains and ordinary income up to $3,000 for federal tax purposes. Massachusetts allows losses to offset any amount of gain (offset limited to amount of gain) and to offset up to $2,000 of interest and dividends. Capital losses cannot be used against other ordinary income.

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likesky1010Author

Level 4

I asked AI to help me. This is the response:

The response you received on the TurboTax community is partially correct but lacks the nuance that applies to your specific status as an electing MTM trader.

While it is true that Massachusetts does not have a statute that perfectly mirrors Federal Section 475(f), it is a common technical misunderstanding to assume that these losses must always be capped on Schedule B.

Why the Community Response is "Right" (The Technical Detail)

Decoupled Code: The response is correct that Massachusetts uses its own tax code, which does not explicitly adopt every new federal election.
Capital Loss Limits: Massachusetts is strict about limiting Capital Losses to a $2,000 deduction against interest and dividends. If your trading is categorized as "investing," the response is 100% correct.

Why the Response is "Wrong" for You (The Professional Reality)

As an electing Section 475(f) MTM Trader, your activity is no longer "investing"; it is a Trade or Business.

Form 4797 Reporting: Federally, you use Form 4797 (Sales of Business Property), which reports ordinary income/loss.
MA Business Income: Massachusetts Line 6 (Business Income) is designed to capture income and losses from a "Trade or Business". If you are a professional trader, your MTM loss is a Business Loss, not a Capital Loss.
Audit Defense: Tax professionals often argue that since the MTM rules were enacted before the 2005 Massachusetts code linkage date, the election should be recognized as a valid method of business accounting in MA.

maglib

Answer

Level 11

Mass instructions see Page 11-12

There is NOTHING within Mass directives nor instructions allowing MTM for Personal tax returns.

You are correct for IRS definitions of trader/ business can be seen in TC429

Non-Conformity: MA does not automatically adopt the federal section 475(f) MTM election.
Reporting Differences: While federal returns report MTM on Form 4797, Massachusetts generally treats securities as capital assets, meaning traders may need to reconcile this difference on their Massachusetts tax filing, treating losses as capital losses rather than ordinary losses.
Trader Status Definition: Similar to federal rules, Massachusetts evaluates if taxpayers are active traders (seeking profit from daily market movements with substantial activity) or investors.
Capital Gains Tax: Massachusetts taxes capital gains based on holding periods, often at a flat rate, regardless of the MTM election used on the federal return.
Trader vs. Investor Status in Massachusetts for EXPENSES:
- Trader (Business): Engaged in trading with "continuity, regularity, and frequency". According to a 2011 JD Supra article, a trader focuses on short-term market movements.
  - Investor: Focuses on long-term capital appreciation, dividends, or interest.
  - Key Distinction: The 2011 Lexology Mass Report notes that Massachusetts tax authorities consider whether a fund is "seeking to profit from daily market movements" (trader) versus holding for investment.
  - Tax Implications: As detailed in this KPMG Investor vs Trader traders may deduct expenses under IRC § 162, while investors are limited to IRC § 212 deductions.