Sec. 475 Mark-to-Market Election Question and Tax Year It Is Effective?

[Critter-3]

Basically .... when you take the MARK TO MARKET election  then all your positions are considered "sold" at the end of the year  and all gains & losses are computed  and reported on the return without  consideration to the loss limitation rules as ordinary income not capital gains or losses.    Then the basis for each position is reset to that figure and used for the next year's computations.  A trader may also deduct the expenses of their "business" venture on the Sch C.    

Please read up on this situation thoroughly before taking this step.    https://www.thetaxadviser.com/issues/2010/feb/sec475mark-to-marketelection.html

[Trader]

@Critter-3Thank you so much for every reply you have given. You definitely deserve best answer, for helping me greatly.

"Please read up on this situation thoroughly before taking this step.    https://www.thetaxadviser.com/issues/2010/feb/sec475mark-to-marketelection.html"

I actually read that article and it was one of the ones that brought me here. As it made it sound like I could still claim the election for this tax year (tax year 2021), when I file my taxes in Feb or March of next year. Then I went over to the IRS section of it and it said that was not true. Which confused me, because this election seems to be one of the few that actually needs to be claimed in a Prior year's tax return for the current tax year. Which seems to me to be like Fortune Telling, like how many other traders do not know if they are going to take up trading. Like how many of us are exactly at the same place in life when we first started the year. Add into that traders need to show actual trading first, then it seems to be a no-win situation.

Now that article did tell me that essentially if I am accepted for Mark to Market election, my trading basically becomes a business. Which is okay, for a few years I ran a small eBay shop and had to handle my taxes from that, but I had to stop due to medical issues. However, the key difference there is that I got taxed on my actual gain and not on non-existent gains, which is the issue that seems to cause all the confusion. Like if you don't make a million or 100k, how can you get taxed on it? That seems to be the issue that causes the problem.

"Basically .... when you take the MARK TO MARKET election then all your positions are considered "sold" at the end of the year and all gains & losses are computed and reported on the return without limitation to the loss limitation rules as ordinary income not capital gains or losses."

But without the Mark to Market Election, since from everything I read elsewhere and seen here, if I am accepted for it, the election would not actually take affect until next tax year. Which means this year in order to book any real losses and get those losses deducted from my gains, I just need to stop trading in November or October?

Basically, I am trying to understand that the Wash Sale rule does not some how make losses magically disappear. Like if I took a loss on a stock and want to book that loss, I just need to stop trading in October or November and then everything is good to go. My losses become realized and my actual gain (currently 12K) is the only gain I have to worry about the IRS taxing me on.

[Critter-3]

The election must always be made a year in advance ... this has always been the rule so if you want to make the change you must do it with a timely filed return for the next tax year.   Wash sales do not come into play when you use the Mark to Market option.   Please seek information from your broker ... a face to face conversation where you can ask questions and get immediate answers may be the best thing for your understanding of this matter ... you have about 8 months to get educated.  

Read the info under Capital Gains & Losses : 

https://www.irs.gov/help/find-information-on-complex-tax-topics

[M-MTax]

Agree with @Critter-3..... ALSO @Trader you DON'T have to stop trading completely in November.....You just CAN'T trade SUBSTANTIALLY IDENTICAL securities involving losses or those losses can't be recognized without an MTM election. Like @Rick19744 said.....keep a list of "no trade" stocks.

[M-MTax]

My losses become realized and my actual gain (currently 12K) is the only gain I have to worry about the IRS taxing me on.

You should understand the difference between "realized" and "recognized" for tax purposes.....it's important.

You should read this article.... https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1979208 .... good short swing traders make money in both up AND down markets. Also the most successful traders I've know and have met....which are quite a few.....trade FUTURES NOT STOCKS. Futures traders don't have to be concerned with wash sale rules and the tax treatment is more favorable than it is for stocks or options.

In the end you have no idea whether you will have a 12K gain when the year is out if you keep daytrading.

[Trader]

"

The election must always be made a year in advance ... this has always been the rule so if you want to make the change you must do it with a timely filed return for the next tax year.   Wash sales do not come into play when you use the Mark to Market option.   Please seek information from your broker ... a face to face conversation where you can ask questions and get immediate answers may be the best thing for your understanding of this matter ... you have about 8 months to get educated.  

Read the info under Capital Gains & Losses : 

https://www.irs.gov/help/find-information-on-complex-tax-topics"

@Critter-3 Thank you, I have read that and the 3K limitations on losses and the stipulations for have the status applied. This was my last stop to try to make things clearer. I even asked my broker and informed me about the loss being applied to the Cost Basis of the next stock purchase.

I get it, with all my questions it may seem like I did not do any reading, but I only came here when it was clear that I could not get a straight answer from other sources. Like I literally read multiple articles where CPAs got sued because they did not fully understand the rule and as mentioned I even ran my own little online business for a while. So my thinking was the only person who would know better is a more seasoned daytrader who has been through this multiple times, that they would be able to clear up the confusion on the Wash Sale Rule.

So no take on this:

But without the Mark to Market Election, since from everything I read elsewhere and seen here, if I am accepted for it, the election would not actually take affect until next tax year. Which means this year in order to book any real losses and get those losses deducted from my gains, I just need to stop trading in November or October?

Basically, I am trying to understand that the Wash Sale rule does not some how make losses magically disappear. Like if I took a loss on a stock and want to book that loss, I just need to stop trading in October or November and then everything is good to go. My losses become realized and my actual gain (currently 12K) is the only gain I have to worry about the IRS taxing me on.

Either way @Critter-3 thank you for all of your responses and I will as stated award you the best answer. However, its looking like at this point I am going to have to wing it, stop in October and hope for the best.

[Trader]

@M-MTax 

"Agree with ..... ALSO @Trader you DON'T have to stop trading completely in November.....You just CAN'T trade SUBSTANTIALLY IDENTICAL securities involving losses or those losses can't be recognized without an MTM election. Like said.....keep a list of "no trade" stocks."

I understand, but I just need a clear answer. So say I trade XYZ stock every month, but suffer a loss in one month. Does that loss ever get deducted? Even if I stop trading it in October?

"You should understand the difference between "realized" and "recognized" for tax purposes.....it's important."

I mean as in this is the amount I actually made, which as it stands now is 12K. Will they recognize that I only really made 12K, if I stop trading in October? If that is what I have to do to book any losses?

"In the end you have no idea whether you will have a 12K gain when the year is out if you keep daytrading."

Right, but that would make the situation even more scarier. As the IRS would be taxing me on literally no gains, if the losses never take effect.

[M-MTax · Accepted solution]

So say I trade XYZ stock every month, but suffer a loss in one month. Does that loss ever get deducted? Even if I stop trading it in October?

Yes. All of your CLOSED positions are "deducted" no matter what. The problem comes in where you have a loss in XYZ on a buy/sell and then open another buy position in XYZ. What happens then is your loss is not recognized but that loss is added to the basis of your XYZ position.

I mean as in this is the amount I actually made, which as it stands now is 12K.

What I mean is paper losses are realized while actual losses are recognized for tax purposes unless you elect MTM or there is some law or reg that says otherwise.....like the wash sale rule. In a wash sale you realize a loss but you do NOT recognize the loss for tax purposes until you close the position.

As the IRS would be taxing me on literally no gains, if the losses never take effect.

The losses take effect.....are recognized.....IF you close your loss positions OR if you elect MTM. 

[Trader]

@M-MTax 

"

So say I trade XYZ stock every month, but suffer a loss in one month. Does that loss ever get deducted? Even if I stop trading it in October?

Yes. All of your CLOSED positions are "deducted" no matter what. The problem comes in where you have a loss in XYZ on a buy/sell and then open another buy position in XYZ. What happens then is your loss is not recognized but that loss is added to the basis of your XYZ position.

I mean as in this is the amount I actually made, which as it stands now is 12K.

What I mean is paper losses are realized while actual losses are recognized for tax purposes unless you elect MTM or there is some law or reg that says otherwise.....like the wash sale rule. In a wash sale you realize a loss but you do NOT recognize the loss for tax purposes until you close the position."



Thank you for the straight forward answer, honestly you deserve the best answer reply here, but I gave my word to critter. As others wanted to turn this into more of a personal thing, like "guy don't worry about Sec 475, you don't even qualify". Which ironically as they even pointed the IRS decides that, no one else.

Like I ran a small business, have an MBA and Bachelors, reached out to my broker, sought out multiple articles and I could not get a straight answer until it came from you. Like I just needed someone to confirm my understanding of the rule. That as long as I stop trading in October, giving a 61 (for safety, I will give 61 days) day break from any stock, my losses will count for this tax year. However, as you saw multiple people tried to take it off topic and make it something personal. Not sure why, but if they did not know the answer, I was more then willing to accept "hey, I don't really know the answer on that" or "I am not really sure on that".

However, thank you very much for the straightforward answer. As mentioned, I just needed someone to confirm my understanding, that as long as I stop in October or November, I am good. Give a 61 day break and the IRS will not say "hey you actually made 1mil somehow, even though your account is only 37K".

@M-MTaxAgain, thank you very much.

[Trader]

@M-MTaxCould not do you dirty, even if it means breaking my word. You actually answered my question directly and did so without personal attacks. You deserve best answer here.

Update:

Looks like I can do 2 best answers, thank. Critters first response does deserve it and your response definitely deserves.