I don't trade every day, but I trade a good amount. I also don't do a ton of "round trip" trades (buying an asset and selling the same/similar assets in a short period of time), but again i have a good amount of activity. I do not have a standard 9-5 job, and my daily "job" as I view it is watching my investments and the market. So I'm just wondering what I need to "prove" for the filing status, and also all of the overall benefits (I know it basically releases the wash-sale rule, but I wasn't certain what else). Thanks!
you misunderstand. the wash sale rule applies even to traders unless they make the mark-to-mark election. 475(f) which must be filed with the return for the previous year on or before its unextended due date. if you can't file the return by the due date. the election must be attached to a timely filed extension. the downside to the M-T-M election is that gains and losses from the securities are ordinary income.
based on what you have provided you would not qualify as a trader allowed to make the M-T-M election. you are an investor
Traders
Special rules apply if you're a trader in securities, in the business of buying and selling securities for your own account. The law considers this to be a business, even though a trader doesn't maintain an inventory and doesn't have customers. To be engaged in business as a trader in securities, you must meet all of the following conditions:
You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
Your activity must be substantial; and
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 trading business:
Typical holding periods for securities 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; and
The amount of time you devote to the activity.
If the nature of your trading activities doesn't qualify as a business, you're considered an investor and not a trader. It doesn't matter whether you call yourself a trader or a day trader, you're an investor.
yes i understand the MTM election, and my understanding is it's only available to traders.
My activity is substantial (over 400 equity and option trades net) and it is my only source of income.
in reading further through, though, the MTM election also seems to prevent you from tax benefit of long term gains, correct?
@Mike9241 provided some good detail on what the IRS will look at in determining trader tax status (TTS).
However, you should keep in mind, that most professionals in this area have a minimum of 720 trades a year. This is based on the Poppe vs Commissioner case.
Also keep in mind, that should you qualify for TTS, this doesn't change the character of your gains and losses unless you elect mark-to-market. A qualified TTS will allow an individual to claim expenses on Schedule C. Your trading activity will continue to be reported on form 8949 and Schedule D.
At this point, I would caution you that you are several hundred trades away from what most professionals look to for guidance in the number of trades; and frequency, etc.
I would recommend seeking advice from a tax professional if you are wanting to claim TTS.
also to your question which I had answered. if you go the mark-to-market route the gains and losses are ordinary. also, at year-end you have to pick up as income any unrealized gains and get a deduction for unrealized losses.
A taxpayer may be a trader in some securities and may hold other securities for investment. The special rules for traders don't apply to those securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day he or she acquires them (for example, by holding them in a separate brokerage account). trades put in the investment a/c won't count as trades made as a trader so you would be farther from the minimum number of trades to qualify as a trader.
here from an article from FORBES on that court case
The Poppe court awarded trader tax status (TTS) with 720 trades (60 trades per month). That’s less than our 2015 golden rule calling for 1,000 trades per annum on an annualized basis. Poppe seems to have satisfied our other golden rules on frequency, holding period, intention to run a business, serious account size, serious equipment, business expenses, and more. Plus, Poppe had a good background as a stockbroker.
more about the case
Taxpayer was a teacher. During the school year, petitioner traded every day during the two free school periods and devoted substantial time--four to five hours a day--to researching his trades. Petitioner testified that some of his trades were short-term trades for options with monthly expiration and some of the trades were stocks. Although petitioner occasionally received dividends on stocks he traded, those dividends were incidental. Petitioner claims his intent was to make short-term trading profits. Petitioner testified he executed about 60 trades per month.
Petitioner lost the case because he couldn't prove he made a valid 475(f) election.