I am a day trader. How, exactly, do I report my investment income ($50,000 in losses, actually) into TurboTax, so that I can capitalize on the full range of deductions?

[bwa]

I haven't registered sole proprietorship...I don't have a fiticious business name.  extensive day trading on daily basis automatically puts me in as sole proprietorship?

No registration is necessary nor due you need an assumed name to be a sole proprietorship. For earned income, you are usually either an employee (and receive a Form W-2) or are self-employed (i.e., own a business) and receive a Form 1099. While your activity may not seem to rise to the level of a business, the IRS would consider that it does.

For a simple business such as yours, just use your name as the business name, and your social security number as the business EIN.

What can I do to write off carry over capital losses completely?  At first, I thought M2M election will take care of it.

The only way is to have offsetting capital gains.  MTM is not a panacea for prior year losses.

Assuming M2M election is done for 2016 year, can I write off 2015 day trading losses?

Sorry, but no.  The election only applies to years that the election is for and subsequent years.  2015 losses are still subject to the normal capital loss rules because there was no MTM election for that year.

If I end up with capital losses again this year, in 2017, can I fully write off 2016 capital losses in day trading? 

If you elect day trading in 2016 (by April 15) you can write off losses in 2016 on your 2016 tax return.  On the other hand, if I was planning on having losses I would get out of day trading (sorry for the editorial comment.)

[shunchang]

Thanks again.  so much clearer now.  But still need your help to clarify for the last question.

After M2M election, capital losses (day trading) in 2016 can be carryover to 2017 and fully offset if 2017 is a profitable year?

Once M2M election is made for 2016, gains and losses will be converted to as ordinary income.  Therefore, carryover capital losses from prior years cannot be offset?

[bwa]

Capital losses in 2016 can carryover to 2017 and offset capital gains in 2017, not day trading gains.  You can't use MTM to treat day trading losses as ordinary losses but day trading gains as capital gains that offset capital losses.  You need to be consistent - they are one or the other.  They can't be both merely because it is tax advantageous to be both.

You are correct - once M2M election is made, gains and losses IN 2016 FORWARD will be converted to ordinary income and losses.  As a result, carryover capital losses from prior years cannot be offset against those gains.  They can be offset against any gains on securities you designate as investment securities WHEN YOU BUY THEM.  As the IRS notes "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).

Remember that in addition to the election you also have to file Form 3115.  If you haven't read this IRS article, you should:  <a rel="nofollow" target="_blank" href="https://www.irs.gov/taxtopics/tc429.html">https://www.irs.gov/taxtopics/tc429.html</a>

[louka]

hi @bwa, almost a year later and you're still helping people. These answers are better than anything else I've found. I have one more for you as I go thru my journey as potentially looking for this election. You may have answered but just need clarification.

Ex: I have 50k in losses in 2019. It is now 2020 and have become an active day trader. Given if I request MTM status, you mentioned you cannot convert the 2019 loss and deduct the full amount in 2020 if given the status.

Let's say in 2020 I apply qualify for MTM, and I keep separate accounts: 1 for buying/selling securities on a swing basis, and one for day trading. I happen to gain, let's say 50k in gains in my non day-trading brokerage account. 

It sounds like from your last answer when you said that securities "you designate as investment securities WHEN YOU BUY THEM", you can somehow do both, and claim the gain and offset the loss of previous years, while still being under MTM for day trading gains/losses for the latest year? As long as you keep separate record?

Thanks in advance.

[fanfare]

If you are a Professional Trader, you must maintain a separate account dedicated only to that activity.

And if you want to make long term investments, maintain a separate account for that.

[CloakedOwl]

I find it interesting that he is asking for tax advice and you give him trading advice.  I would guess that you know nothing about his life or financial situation to judge what a lot of money is to someone.  Maybe next time just try to answer the question and keep your unsolicited advice to yourself.  

[Derek_H]

My losses from the Schedule D then should be included on my Schedule C before transferring over to Line 12 of Form 1040.

Thank you for your very informative email.  Do you know whether TurboTax supports the MTM accounting method for trading after the MTM election is made?  I made the election for the 2018 tax year outside of TurboTax but would like to return to TurboTax this year.  Thank you for your help!

[Derek_H]

Thank you for your very informative email.  Do you know whether TurboTax supports the MTM accounting method for trading after the MTM election is made?  I made the election for the 2018 tax year outside of TurboTax but would like to return to TurboTax this year.  Thank you for your help!

[DawnC]

Yes, if you made the election in a previous year, you can use TurboTax to file your trading business this year.

To make the mark-to-market election for 2019 you needed to attach a statement to your 2018 tax return.   There is not an actual form for making this election.  The election would need to have been made with last year's return (2018).   The statement should have included 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 (2019); and
3. The trade or business for which you're making the election.

When you file in 2019 you will need the online Self-Employed or cd/download Home and Business (recommended) version of TurboTax since your trading will be reported as a business.  

Please see IRS Tax Topic 429 (Traders in Securities)  for more detailed information on how to make the election in 2018 effective for tax year 2019, how to report this on your 2019 return, and special requirements to be able to make this election.

[fanfare]

@DawnC   "When you file in 2019 you will need the online Self-Employed or cd/download Home and Business (recommended) version of TurboTax since your trading will be reported as a business."

No, TurboTax Deluxe CD/download will handle 
Professional Trader Status

just fine, if reporting as a sole proprietor. 

[david ka]

I know it is too late an answer for your question. I am hoping somebody wil find this useful. you need CD version of TT, go to forms. then schedule C. then go to form 8829, on part II, figure your allowable deduction. Line C 1-3, you can transfer the gain from schedule D to here.

[david ka]

see answer from above

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I have the same issue - I have trading income reported on Schedule D (> expenses), but the Business section of TurboTax Windows won't let me report Home Office Expenses because the Business section shows a loss (since income is 0).  How do i transfer the Schedule D income to Schedule C and Business section, so TT-Windows let's me enter and deduct Home Office expenses

[david ka]

I have the same issue - I have trading income reported on Schedule D (> expenses), but the Business section of TurboTax Windows won't let me report Home Office Expenses because the Business section shows a loss (since income is 0).  How do i transfer the Schedule D income to Schedule C and Business section, so TT-Windows let's me enter and deduct Home Office expenses

[fanfare]

Day Trader Status is just a status maintained by your broker on your investment account.

Day Trader is not a profession.

Unless you have obtained Professional Trader Status, you are considered by the IRS an Investor like all the rest of us.

I suspect filers deducting expenses on Schedule C related to investing are filing improperly.

[Shiny69]

Let's say I have correctly reported mark to market in time, and am only day trading. When one talks of reporting income and losses, do I need to report every trade - winning trades as profit and losing trades as losses? Or, do I report the profit or loss from each ticker at the end of the day? Or, can I just report my net profit, or loss, at end of the year as one entry? Thx. 

[fanfare]

"do I need to report every trade - winning trades as profit and losing trades as losses?"

Yes.

For this reason, on Form 4797 , as per IRS instructions,

in description, enter "Trader-see attached" and your year over year profit or loss.

Then you will attach the details of every closing transaction that you entered into during the calendar year.

So far, the tax software does not support a PDF transaction detail attachment to Form 4797 so you have to file on paper.