Mark to market election under section 475(f) questions

[E9591CA009]

In tax year 2022, I had more than enough daily trading activity to qualify for TTS since end of June 2022. In 2022, I also formed a single member LLC taxed as an S-corp but did not have any activity on the business, did not start the business brokerage account, did not do anything with the business so the taxes will be pretty bare for the business.

In January 2023, I started the business brokerage account for the S-corp and have been trading on that ever since and will continue to exclusively trade on that account.

I would like to make the MTM election for 2023 year on the 2022 taxes. Would I include the MTM statement,  that states 1) that you're making an election, 2) the first tax year which it's effective, and 3) the trade or business for which you're making the election, to the personal income tax return or to the tax return for the S-corp? Also, for the trade or business would I just specify that it is for the S-corp and give the name? And also, the form 3115 with the tax return, would this be attached to the personal income tax return or the tax return for the S-corp?

For this whole process, the deliverables that I will need to send are 1) income tax return, 2) S-corp tax return, 3) MTM statement, 4) form 3115 with tax return, and 5) form 3115 to the IRS national office at 1111 Constitution Ave., NW Washington, DC 20224. Are there any other deliverables that I need to send to get this election done?

And lastly, it is my understanding that I need to file these tax returns/deliverables through the mail. Is this true and are you aware of a deadline for sending it through the mail?

Thank you so much

[AmyC]

1. If all of your trading will be inside the S corp, you would need the personal election. The S corp is generally not recommended for traders. It requires you pay yourself wages on a w2, you must pay 15.3% in Social Security and Medicare tax on income. Please review business structures.

2. You have the complete list.

3. Yes, you need to mail your effected return(s) with the election attached. 

Topic No. 429 Traders in Securities Form 1040: A trader must make the mark-to-market election by the original due date (not including extensions) of the tax return for the year prior to the year for which the election becomes effective. You can make the election by attaching a statement either to your income tax return if filed without an extension or to a request for an extension of time to file your return. The statement should include the following information:

1. That you're making an election under section 475(f);
2. The first tax year for which the election is effective (that is, the tax year for which a timely election is being made); and
3. The trade or business for which you're making the election.

Refer to the Instructions for Schedule D (Form 1040), Capital Gains and Losses  for more information on how to make the mark-to-market election. It's important to note that in general, late section 475(f) elections aren't allowed.

[Edited 3/1/2023 9:07 am]

[E9591CA009]

Hello,

Thank you for taking time for a response. @AmyC 

How will the IRS be aware of the trading activity on my income tax return that qualifies me for TTS/MTM election if I am making the election with the 1120-S for the business, since the business did not have any trading activity last year?

Can I mail my personal income tax return with the 1120-S/MTM statement/3115? Or do I need to file them separately?

Thank you

[GeorgeM777]

The IRS will be aware of your trading activity by reviewing, if they choose to do so, your trading activities as listed on the statement you will need to attach to Form 4797, Sale of Business Property.  When you elect Mark to Market accounting, you will be completing Form 4797 and attaching a statement to such form that lists all your transactions in a manner consistent with the columns of information on Form 4797.  While TurboTax supports Form 4797 (and you will need TurboTax CD/download, not TurboTax online), presently there is no way to upload and attach your transaction list to Form 4797.  Thus, you will need to paper mail your return to the IRS.

To follow-up on the post from @AmyC, filing as an S-Corp is a tax election.  An S Corp is not a legal entity in the same way as your LLC. Thus, you should file the Mark-to-Market election statement in your name as the owner of your LLC.  The MtM election statement you will file by the tax due date (April 2023, and there are no extensions allowed for the MtM election) is prospective in that the IRS will know that for tax year 2023 you have elected the MtM accounting method.  

Yes, you can mail your tax return to the IRS.  In fact, as there is no way to attach the MtM election statement to your return, you will need to paper mail your return to the IRS.  Include Form 3115 with your return. 

@E9591CA009 

[E9591CA009]

@GeorgeM777 

Thank you for taking the time for your response.

Would I be submitted 4797 although the trading was not in the name of the business, it was an individual brokerage account in my name? There were not gains/losses/profits for the business in 2022. I see that 4797 is required when making MTM election, but I am confused about the business part since 2022 was not associated with the business.

The S-corp due date for MTM election is March 15th, different from the due date for individuals. If I am filing it on my income taxes because S-corp is not a legal entity, why do they have this due date and who would be using it?

So to clarify, I am submitting the taxes for my S-corp:

Form 1120-S

For my income:

Income tax return

MTM statement with name of S-corp LLC

Form 3115 with tax return and to IRS national office

Form 4797

Thank you so much

[GeorgeM777]

At some point you probably should consider changing the account information for your brokerage account to reflect the name of your LLC with you as the owner/member. Individuals cannot elect to be taxed as an S Corp, but an LLC can make such an election.  Moreover, the documents you filed with the state (articles of formation/organization or similar document) should reflect the purpose of your LLC, which we assume is securities trading.  

Given that all of the income of your S Corp will pass to you, and given the fact that an S Corp does not pay taxes, you probably should put your name on Form 4797.   Single member LLCs are treated, for tax purposes, the same as a sole proprietor.  A securities trader who has not made the MtM election would prepare a Schedule C, Profit or Loss From Business, but in your case, because you are planning on making the MtM election, you will complete Form 4797.  

You will need to use TurboTax CD/download because to enter your transaction information on Form 4797, you will need to go into Forms mode and effect manual entries.  Moreover, TurboTax currently does not support the statement that you need to attach to Form 4797; therefore, you won't be able to e-file your return through TurboTax.  Consequently, you will have to print out your return and paper mail it to the IRS along with the attached statement for Form 4797.      

Regarding your S Corp and its filing deadline, S Corps are pass through entities.  As you noted in your post, S Corps are not legal entities created through a state filing but rather, an S Corp is a tax election.  Your S Corp will issue you a Schedule K-1 reflecting your profit and loss from the business. Because Form 1120-S needs to be completed first before Schedule K-1s can be issued, and because of IRS matching, Form 1120-S has an earlier filing deadline than a personal income tax return.  

@E9591CA009 

[Tran2]

@GeorgeM777 @AmyC 

Hello George and Amy,

1.I was wondering as an individual day trader can I use mark to market election on my 1040 return.

2. Also do I need to ask my trading brokerage to use mark to market accounting method in order to use the election?

3. I just recently ask to switch to mark to market election accounting method in September 2023, would that mean that in 2024 return when I use 475f I would just only be able to get the loss from September 2023 to December 2023 or how can I get that effect for the whole year 2023 because I was not aware of the 475f election.

Thank you so much and I am looking forward to hearing from you soon.

[Critter-3]

1.I was wondering as an individual day trader can I use mark to market election on my 1040 return.   Yes you can if you made the election timely.

2. Also do I need to ask my trading brokerage to use mark to market accounting method in order to use the election?  They will not do so ... they cannot do so.  This is accounting you need to do for yourself. 

3. I just recently ask to switch to mark to market election accounting method in September 2023, would that mean that in 2024 return when I use 475f I would just only be able to get the loss from September 2023 to December 2023 or how can I get that effect for the whole year 2023 because I was not aware of the 475f election.  Sorry Charlie ... you cannot use the MTM election for 2023 at all since you did not make the election timely.  The election for 2023 had to be made by 4/15/23.  If you want to make that election for 2024 you need to file the election by 4/15/24. 

[dc20222023]

Hi @AmyC @GeorgeM777 @Critter-3 

I am a stock trader (TTS) - sole proprietorship. It is not an S-corp so no earned income. Would I need earned incomes (get another W2 job or another self-employment income stream) to write off trading expense (e.g. home office expense) or I can write my trading expense off the Sec. 475 Mark-to-Market election ordinary income (non earned income)?

Also, if my brokerage firm doesn't offer mark-to-market accounting, can I simply use the beginning account value of Jan and ending account value of Dec, which are easily available in any broker's monthly statements, to get the 475 income that year? I only trade stocks, or selling naked puts or covered calls. Thankss!

[DavidD66 · Accepted solution]

A qualified trader (someone with Trader Tax Status) is allowed to deduct business expenses on Schedule C (Form 1040) Profit or Loss From Business (Sole Proprietorship).  This includes taking Section 179 deductions and expensing (or capitalizing and depreciating) equipment used in trading activities.  Commissions and other costs of acquiring or disposing of securities aren't deductible but must be used to figure gain or loss upon disposition of the securities.  Gains and losses from selling securities from being a trader aren't subject to self-employment tax.

 The IRS defines a qualified trader as one who trades often and continuously to profit from the short-term fluctuations in market prices. To become a qualified trader, you must trade on a full-time basis. Trading must be the majority of your income. Traders make multiple trades per day and research, document, and educate themselves on the art of trading.

See IRS Topic no. 429, Traders in securities (Information for Form 1040 or 1040-SR filers) for more information.

If you are not a qualified tax trader, the IRS does not consider trading to be a business, all income earned is considered unearned or passive income.  Your income isn't subject to self-employment taxes. You can't deduct normal business expenses, even though the costs incurred to become a successful trader can be significant.

There are no rules regarding how your broker/dealer tracks and reports gains and losses.  If your brokerage firm doesn't offer mark-to-market you can still use it, however, the tracking could get cumbersome.  There are software programs available that will compute gains and losses, and track cost basis using mark-to-market.  If you trade enough to qualify for Trader Tax Status, and your broker doesn't offer mark-to-market accounting, I recommend using one, if you have made a mark-to-market election under Section 475.  

[dc20222023]

Thank you very much @DavidD66 ! I heard about the software for trader accounting, but I am trying to think why the account value on brokerage firm's statements isn't simply just the mark-to-market numbers that we need, if I only buy or sell stocks, naked puts, calls. It took into consideration of both realized and unrealized gain/loss?

[DavidD66]

All the information you need to track your gains and losses using mark-to-market is in the brokerage statements.  I'm not saying you can't do it, I'm just saying it can get messy and cumbersome.  You'll need to do a reconciliation between mark-to-market and your brokerage statement/1099-B each year.  Year one will be very simple.  The next year you have to account for prior year adjustments, etc.  If you have options assigned, or what would be wash sales, had you not made a Section 475 election, it can complicate things.  If you were ever audited, the software and the supporting reports would be very helpful.  Taxpayers can prepare their own tax returns without using tax software, but why would anyone want to do so?   

[dc20222023]

@DavidD66 My brokerage firm figured it out! 😄

I am also trying to figure out SEP IRA contribution for 2023 (because I am late for solo 401k). I have another LLC other than my trading Sole Proprietorship. The SEP IRA doesn't tie to a specific business in TurboTax but trading income, with or without mark-to-mark election, is not earned income so can't make SEP IRA or solo 401k contribution, right?  On the SEP IRA worksheet (Turbotax desktop) the net profit included my LLC expense and my trading schedule C expense but did not include my LLC income (1099-NEC). And on the QBI Deduction Smart Worksheet, my SEP IRA contribution went to both my LLC and my trading Sole Proprietorship. How to fix this? Thankss

[DavidD66]

You are correct, you cannot include your trading income to calculate contributions to retirement plans, since it is not considered "earned income".  Since you are using the Desktop version of TurboTax, I suggest you go to the "Forms" view of the program.  If you are not familiar with the forms view, see this TurboTax help article:  What is Forms Mode?   You can use a third party online calculator to determine your SEP contribution.  Make adjustments to the worksheets that calculate the contribution and QBI Deduction, or enter correct amounts directly on the forms - if allowed (some fields can be changed, others have to be changed in the underlying schedule/worksheet.  

[dc20222023]

@DavidD66 the only related form that I can edit is the Keogh, SEP and SIMPLE Contribution Worksheet. Since it doesn't separate different companies, no matter what SEP IRA contribution amount that I type in, the same amount will go to both companies.