3115/mark-to-mark day trader

[Sam Hopi]

Hi, I want to start day trading 1/1/2024 , should I file 3115 through my 2023 tax return? I already read 3115 instruction so confused regarding preceding year and before tax due date so please just give the answer by YES or NO and example with year like 2024, 2023, ..... and due date. If I want to have extension for 2023 when should file 3115? Around 16 OCT or April 15 2024?

question 2:

If I have had a loss $10000 for day trading in 2023; and never filed 3115, what can I do? Please just give me the answer and do not copy paste the instruction since I already read it but did not get it.

[Anonymous_]

Are you certain you want to make an MTM election? I suspect you understand that you don't need to file a 3115 to trader status alone.

I will page Champ @Mike9241 

[Rick19744 · Accepted solution]

A few comments addressing your specific questions (and maybe a few additional comments):

• You cannot elect MTM for 2023.
• If you want to make a MTM election for 2024 you must do so by the original due date of the 2023 tax return; prospective only.
• Your trading activity for 2023 is treated just as any other capital investments
• If you are struggling here, I am going to recommend that you have a tax professional prepare your tax return if you are day trading.
• As noted by @Anonymous_ , you can be a day trader and not have a MTM election
• You need to make sure you qualify for trader tax status (TTS) before you make any MTM election.
• Once you make the MTM election, you need permission to revoke the election
• This is a highly scrutinized area

[Sam Hopi]

Thanks but I did not get my answerers.

[Sam Hopi]

Thanks , I did not understand what you meant. Any want to be as day trader for 2024 should file 3115 along with tax return 2023 . Is this right?

I want to start day trading 1/1/2024 , should I file 3115 through my 2023 tax return? I already read 3115 instruction so confused regarding preceding year and before tax due date so please just give the answer by YES or NO and example with year like 2024, 2023, ..... and due date. If I want to have extension for 2023 when should file 3115? Around 16 OCT or April 15 2024?

question 2:

If I have had a loss $10000 for day trading in 2023; and never filed 3115, what can I do? Please just give me the answer and do not copy paste the instruction since I already read it but did not get it.

[Anonymous_]

Read @Rick19744's post again and note:

• If you want to make a MTM election for 2024 you must do so by the original due date of the 2023 tax return; prospective only.

Again note that you do not have to file a 3115 for trader status; only if you want to make an MTM election.

[Anonymous_]

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@Sam Hopi wrote:

If I have had a loss $10000 for day trading in 2023; and never filed 3115, what can I do? 

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You can use the $10,000 loss to offset any capital gains you may have during the 2023 tax year. Then, you can use up to $3,000 of any unused capital loss to offset all other types of income (with the balance carried over to the 2024 tax year).

[Rick19744]

Reply to your follow-up:

• As noted previously, this is a complicated area and highly scrutinized.
• You need to make the MTM election by the original due date of your 2023 tax return.  If you are extending your 2023 tax return, then the election needs to be filed with the extension.  This means you will need to paper file the extension and election.
• The form 3115 will need to be attached to your 2023 return when filed.  You also need to file a second copy of the form 3115 with the IRS National Office.
• The MTM election and form 3115 are two different filings.  The form 3115 is not the actual election.
• As noted in my previous response, your 2023 investment activity is handled just like anyone else; reported on form 8949 which carries to Schedule D.
• You need to get some professional tax advice.  You can be a day trader, you can be a day trader with trader tax status (TTS), and you can have TTS and make a Section 475 election.  Each of these has different tax implications.
• When you make your MTM election you need to be clear and specific on what the MTM is covering; securities only, include commodities / Section 1256 contracts, etc.  This is very important and understanding what to include in the election is critical.
• You can only make the MTM election if you have TTS.  This is not an easy hurdle and understanding the volume of trades to attain this is important.
• I don't recommend you do anything until you have had a meeting with a tax professional and you understand what you are getting into.  Keep in mind that not all tax professionals have a good grasp on this area of tax.

[Mike9241]

From IRS PUB 550

Special Rules for
Traders in Securities
or Commodities
Special rules apply if you are a trader in securities or commodities in the business of buying
and selling securities or commodities for your
own account. To be engaged in business as a
trader in securities or commodities, you must
meet all the following conditions.
• You must seek to profit from daily market
movements in the prices of securities or
commodities and not from dividends, interest, or capital appreciation.
• Your activity must be substantial.
• You must carry on the activity with continuity and regularity.
The following facts and circumstances
should be considered in determining if your activity is a securities or commodities trading business.
• Typical holding periods for securities or
commodities bought and sold.
• The frequency and dollar amount of your
trades during the year.
• The extent to which you pursue the activity
to produce income for a livelihood.
• The amount of time you devote to the activity.
If your trading activities do not meet the
above definition of a business, you are considered an investor, and not a trader. It does not
matter whether you call yourself a trader or a “day trader.”
How To Report
Transactions from trading activities result in capital gains and losses (unless a Trader makes a section
475(f) election) and must be reported on Form 8949 and Schedule D (Form
1040), as appropriate. Losses from these transactions are subject to the limit on capital losses
and the wash sale rules.
if you qualify as a trader you can make the Mark-to-market election (not required). If you made
the section 475(f) mark-to-market election, you should report all gains and losses from trading
as ordinary gains and losses in Part II of Form 4797, instead of as capital gains and losses on
Form 8949 and Schedule D (Form 1040). Also, the wash sale rules do not apply. In that case, securities or commodities (depending upon which election was made) held at the end of the year in your business as a trader are marked to market by treating them as if they were sold for fair market value on the last business day of the year and gain or loss is recognized. But you do not mark-to-market any securities or commodities you held for investment. Report sales from those securities or commodities on
Form 8949 and Schedule D (Form 1040), as appropriate, not Form 4797. 
Note. You may be a trader in some securities or commodities and have some securities
or commodities that are not held in connection with your activities as a trader, such as those
held for investment. The special rules for marking to market discussed here do not apply to the
securities or commodities held for investment. You must keep detailed records to distinguish
those securities or commodities. The securities or commodities held for investment must be
identified as such in your records on the day you acquired them (for example, by holding
them in a separate brokerage account) specifically identified under section 475.
Expenses. Interest expense and other investment expenses that an investor would deduct
on Schedule A (Form 1040) are deducted by a
trader on Schedule C (Form 1040), Profit or
Loss From Business, if the expenses are from
the trading business. Commissions and other
costs of acquiring or disposing of securities or
commodities (depending upon which election
was made) are not deductible but must be used
to figure gain or loss. The limit on investment interest expense, which applies to investors,
does not apply to interest paid or incurred in a
trading business.
Self-employment tax. Gains and losses from
selling securities or commodities as a trader are
not subject to self-employment tax. This is true
whether the election is made or not.

note that form 3115 is not required if the 475(f) election is made for the trader's first year of business. REV PROC 2023-24

[Rick19744]

@Mike9241 response included the following:

note that form 3115 is not required if the 475(f) election is made for the trader's first year of business. REV PROC 2023-24

The Rev Proc cited is a general revenue procedure that deals with accounting method changes.

Let's clarify this for readers.

A form 3115 never needs to be filed when making an election in a taxpayer's first year.

However, based on these facts, that does not apply.

The revenue procedure states "Form 3115 filing requirements. In addition to filing the Election Statement described in section 24.01(4) of this revenue procedure, unless the election year is the first taxable year in which the taxpayer owns securities or commodities, whichever is applicable, a Form 3115 is required to be filed with the federal income tax return for the year of change (the election year)...".  

This is NOT the first year you have owned securities, and hence, you do need to file form 3115 as noted previously.

Additionally, if this is a sole proprietor, this also is not your first year 1040.

[Sam Hopi]

Hi Mike. I am confused please please give me simple explanation I think you want to tell me what is the different between 3115 and MTM.

I want to start day trading as of 1/1/2024 , should I file 3115 through my 2023 tax return? Yes or No.

If I have had a loss $10000 for day trading in 2023; and never filed 3115, never made any election what can I do when I want to file 2023 tax return?

Could you please explain it what is different making election, 3115 , MTM ? I am confused and I lost my way in all of this words you replied.

[Sam Hopi]

Thanks Rick.

I really did not understand sorry. 

A form 3115 never needs to be filed when making an election in a taxpayer's first year.

However, based on these facts, that does not apply?   What does mean, please give an example.

Please understand me, I read all of this already, my problem is when you are talking about years, I have two questions and I do not know what year of my two questions' are you talking for?

Let's back two my questions':

1-  I want to start day trading 1/1/2024 , should I file 3115 through my 2023 tax return? What is MTM for me in this case? Should I take any election?

Now, please give me the answer based on the REV PROC 2023-24

2- If I have had a loss $10000 ( example) for day trading in 2023; and never filed 3115, never made election, never made MTM,  what can I do, but I am sure I was a day trader per instruction.

Now, please give me the answer based on the REV PROC 2023-24

Perhaps, I have still problem with when 3115 should be filed, when MTM should be elected, what are the differences? Just please go over on Day Trading.

The revenue procedure states "Form 3115 filing requirements. In addition to filing the Election Statement described in section 24.01(4) of this revenue procedure, unless the election year is the first taxable year in which the taxpayer owns securities or commodities, whichever is applicable, a Form 3115 is required to be filed with the federal income tax return for the year of change (the election year)...".  

This is NOT the first year you have owned securities, and hence, you do need to file form 3115 as noted previously.

Additionally, if this is a sole proprietor, this also is not your first year 1040....... I did not get it ???

I really appreciate it for clarification!

[Sam Hopi]

Hi ,

note that form 3115 is not required if the 475(f) election is made for the trader's first year of business. REV PROC 2023-24

Any 475(f) elections is being made by 3115, right? I am confused. 

Sorry about that could please use years (2023,2024,....) or bring here an example what did you mean. First year is not required to file 3115, so what year it will be required? 

Thanks for your help.

[Sam Hopi]

Thanks but I never filed 3115 or any election along with 2022 tax return! I read the IRS publication if you want to be a day trader and use form 4797 line II should file 3115 the year before you want to be a day trader. So I can not do it then I think so.

[Mike9241]

First you must qualify to be a trader.  previously posted what the IRS looks at. As you can read there is no definitive definition of who is a trader. if you qualify, you have the following options.  1) don't make the 475(f)election. In this case, your gains and losses are capital in nature and you are subject to the wash sale rules. 2) make the 475(f) election.  In this case, trading gains and losses are ordinary income and are not subject to the wash sale rules. If this is not your first year trading, regardless of trading as an investor or trader form 3115 is required to report the IRC 481 adjustment. This is the difference between the market value and tax basis of the trading securities you hold as of the end of the previous year - the year before the 475(f) election takes effect.  in subsequent years you pick up as income or loss the unrealized gains or losses on trading securities at year-end while taking into account the unrealized gains or losses you reported in the previous year.  

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for the 475(f) election to be effective it must be made with the return or extension filed on or before its original due date for the year prior to the year the election is to become effective. 

for example, if an election was not made by a timely filed return or extension by the original due date of the 2023 return it's too late to use M-T-M for 2024. your next opportunity is to timely file your 2024 return or extension for the election to become effective 1/1/2025.

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whichever needs careful thought. Getting off M-T-M requires essentially the same procedure as getting on including timely filing of the return or extension for the year before the year the revocation is to take effect.

It should be noted that taxpayers cannot freely elect in and out of mark-to-market treatment. A waiting period of five taxable years is required before an automatic change can be requested to resume using mark-to-market treatment which would again require you to file a timely election along with the 3115. 

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I strongly advise you consult with a tax pro if the election is not in effect to go over your trading activity and get advice. such as whether you clearly qualify as a trader or it's marginal.  costs vs benefits