Day Trader Tax Status and Mark-to-Market Accounting | Stock Basis Question

[starkyfubbs]

Hello. I am reading up on day trader tax status and mark-to-market accounting. I understand the part where one reports all unrealized gains and losses as if one sold all stock on the last day of the year. Then the following year, the new basis is the price of the stock at the beginning of the year. Please correct me if I am mistaken.

What happens to the basis of open positions held before changing to mark-to-market accounting? For example:

1. Purchased stock ABC for $100 in 2018 (i.e. anytime before end of 2021).

2. Stock ABC closes at $50 at end of 2021, and opens at $50 in 2022.

3. Elect day-trader status for 2021 tax return due in April 2022. Mark-to-market accounting will be used for 2022 tax return.

4. Stock ABC closes at $75 at end of 2022, and opens at $75 in 2023.

Is the basis of ABC still $100 (original purchase price) or $50 (price at beginning of year) in 2022?
Is the basis of ABC $75 in 2023?

Thank you.

[M-MTax]

It's marked to the market at the end of the year so you're starting the new tax year with the same basis as the year end value.

[fanfare]

@starkyfubbs 

You have to apply for MTM accounting a year in advance .

When your MTM accounting takes effect you lose any Long Term Holding periods. All stock trades are ordinary income.

If you want to invest Long Term, you'd better set up a separate broker account for that exclusively and move those holdings over.

[Mike9241 · Accepted solution]

since MTM won't be effective until the year 2022 all trades in 2021 are capital in nature and subject to the wash sales rules. in 2022 the basis for gain or loss for securities held on 12/31/2021 is their tax basis.  

1. Purchased stock ABC for $100 in 2018 (i.e. anytime before end of 2021).

2. Stock ABC closes at $50 at end of 2021, and opens at $50 in 2022. tax basis for gain loss in 2022 is $100

3. Elect day-trader status for 2021 tax return due in April 2022. Mark-to-market accounting will be used for 2022 tax return.

4. Stock ABC closes at $75 at end of 2022, and opens at $75 in 2023. you have an ordinary loss in 2022 of $25 and your basis for gain loss in 2023 is the year-end value in 2022 

make sure you file a timely election with your 2021 return or extension. the election will require paper filing of your return or extension. as of now, the election must be filed on or before 4/15/2022. there is no relief for late elections.

[starkyfubbs]

@fanfare Thank you. I was aware that as day trader status and using mark-to-market accounting, one gives up the long-term capital gains tax rates in the trading account. But I did not know one could still have long term positions (taxed at long-term capital gains rate) in a separate account.

[starkyfubbs]

@Mike9241 Thank you, especially for addressing the example. It helped clarify my convoluted question that the basis for gain loss in the first year of MTM is still the original basis, regardless when the stock was purchased (whether it was years before MTM, or during the first year of MTM).