topic How do I apply for Trader tax status (TTS) using TurboTax? in Get your taxes done using TurboTax

How do I apply for Trader tax status (TTS) using TurboTax?

mjb123 — Thu, 03 Dec 2020 18:32:07 GMT

I am a Day Trader and also received a letter from my brokerage stating that I was put on Pattern Day Trader Status.

Re: How do I apply for Trader tax status (TTS) using TurboTax?

M-MTax — Thu, 03 Dec 2020 18:45:04 GMT

Doesn't mean you automatically qualify for TTS. Check the link TTS

Re: How do I apply for Trader tax status (TTS) using TurboTax?

mjb123 — Thu, 03 Dec 2020 18:58:35 GMT

I qualify. How do I make the mark-to-market election under section 475(f)? Can TurboTax do this electronically?

Re: How do I apply for Trader tax status (TTS) using TurboTax?

Anonymous — Thu, 03 Dec 2020 20:28:24 GMT

read this you may be out of luck for the 2020 tax year.

Deadline

The IRS chose an unusual deadline for this election. Most elections are due at the end of the year, when you file your return. This election has to be made by the due date — without extensions — for the previous year’s tax return. The last day to make the mark-to-market election for the year 2020 was July 15, 2020 (the unextended due date for 2019 tax returns).

The main reason for this is to prevent taxpayers from choosing the election at a time when they already know whether their trading activity will generate a profit or a loss. Many traders would wait until they have a year with significant trading losses, then file the election for that year to avoid the capital loss limitation. the election applies to all future years once you make it, but until then you get the benefit of capital gain treatment in profitable years without worrying about the capital loss limitation in a year with poor results.

Making the Election

Making the election is a two-step process (with the second step being in two parts). The first step is to file an election, on or before the unextended due date of your tax return for the year before the year to which the election applies. If you file your tax return by the regular due date, attach the election to your tax return. Thus it must be mailed in. so don't file late and do use a method where you get proof of delivery. If you file on extension, attach the election to your extension request.

Note: You may read elsewhere (as I have) that this election may be filed by itself. The IRS clearly states that the election must be attached to the return or the extension request.

Note: If you filed early you can still make the election if you act by the due date of your return. File an amended return with the election attached.

Here’s what an election would look like, assuming it applies beginning in the year 2021 and that it is filed with the original return or with an amended return filed by the unextended due date:

John Smith
SSN 123-45-6789
Attachment to 2020 Form 1040. I hereby elect to use the mark-to-market method of accounting under section 475(f) of the Internal Revenue Code for my trade or business of trading securities. The first year for which the election is effective is the taxable year beginning January 1, 2021. signed: ________
John Smith

After making the election to change to the mark-to-market method of accounting, you must change your method of accounting for securities under Revenue Procedure 2019-43

https://www.irs.gov/pub/irs-drop/rp-19-43.pdf Section 24.01.

In addition to making the election, you'll also be required to file a Form 3115, Application for Change in Accounting Method PDF. Publication 550 https://www.irs.gov/pub/irs-pdf/p550.pdf

describes the procedures for making an election under the section called "Special Rules for Traders in Securities." Non-filing of the Form 3115 mentioned above won't invalidate a timely and valid election.

If you've made a valid election under section 475(f), the only way to stop using mark-to-market accounting for securities is to file an automatic request for revocation under Revenue Procedure 2019-43, Section 24.02. Under that revenue procedure, the request for revocation must be filed by the original due date of the return (without regard to extensions) for the taxable year preceding the year of change (the year of change is the first taxable year the revocation is to be effective). This revocation notification statement must be attached to either that return or if applicable, to a request for extension of time to file that return. Late revocations won't generally be allowed except in unusual and compelling circumstances.

Re: How do I apply for Trader tax status (TTS) using TurboTax?

fanfare — Fri, 04 Dec 2020 11:57:44 GMT

By the due date of your 2020 return you can submit for Professional Trader Status effective with your 2021 tax return.

You must attach the statement which means you probably have to mail your tax return, since TurboTax has very limited "include an attachment" capabilities.

Re: How do I apply for Trader tax status (TTS) using TurboTax?

hzepeda — Tue, 23 Feb 2021 04:20:43 GMT

It is so complicated. I need to make a Trader Status on my taxes for next year but not sure what to do.

Re: How do I apply for Trader tax status (TTS) using TurboTax?

JeffreyR77 — Tue, 23 Feb 2021 22:58:26 GMT

Follow these instructions from @ColeenD3:

The Mark-to-Market Election

Traders can choose to use the mark-to-market rules, investors can't. If a trader doesn't make a valid mark-to-market election under section 475(f), then he or she must treat the gains and losses from sales of securities as capital gains and losses and report the sales on Schedule D (Form 1040 or 1040-SR), Capital Gains and Losses (PDF) and on Form 8949, Sales and Other Dispositions of Capital Assets (PDF) as appropriate.

When reporting on Schedule D, both the limitations on capital losses and the wash sales rules continue to apply.

However, if a trader makes a timely mark-to-market election, then he or she can treat the gains and losses from sales of securities as ordinary gains and losses (except for securities held for investment - see above) that must be reported on Part II of Form 4797, Sales of Business Property (PDF).

Neither the limitations on capital losses nor the wash sale rules apply to traders using the mark-to-market method of accounting.

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

Re: How do I apply for Trader tax status (TTS) using TurboTax?

ebot — Wed, 13 Apr 2022 21:32:11 GMT

QUESTION ON THIS TOPIC.

I'm a newbie trader.

For tax-year 2021, it's too late for me to make mark-to-market election. I had more losses than expected, but I assume it's just too late now to elect mark-to-market. (Not sure if appealing with a 1040X that I'm a new trader since 1/2021 and didn't realize I'd have to elect 475(f) mark-to-market by 4/2021 would work??).

Anyway, assuming not...at least I have several years of $3k losses to claim all teed up for myself! 🙂

I definitely qualify for "trader tax status" (without MTM) though. I finished all my turbotax entries and directly uploaded all my brokerage statements into Turbotax, so they should be accurate.

For the "Business description" field I entered "Trading options/securities (Trader Tax Status)", and Business code 523900.

I also do some part-time "moonlighting" work in my field as a business (sole proprietor); and had a bit of ebay e-commerce income (which generates a 1099-K nowadays), so altogether I have 3 businesses listed in this section.

However, unlike the other 2 businesses, the Trading options/securities business shows only "Net Income" losses (from subscription services, computer set up). No "Gross Income" (or losses) from the actual trading. Is that because those are already tallied under the Personal Income section > "Investment Income" section? is that normal for "Gross Income" to be blank?

Turbotax estimates my risk of audit is high with all these things going on, which is fine, but I'd prefer to avoid the hassle, so would really appreciate any help ensuring I got this right.

Not even sure in my case (without mark-to-market election), if it's even worth it to claim trader tax status...I guess it allows me to deduct the ~$7k business expenses, but otherwise it seems no real benefit.

Thank you!!!!!!!

Re: How do I apply for Trader tax status (TTS) using TurboTax?

MilZero — Wed, 13 Apr 2022 23:05:54 GMT

on the same shoes here.

Everyone's answers seems to be related to Market-to-Market election only. I can't find any information as to either confirming or denying filing as TTS for the previous year (2021 Tax year filing 2022 in this case).

IRS website has no much information bout TTS filing either, just MTM election to be the next tax year after applying. I'm guessing if even the IRS doesn't list such rule, we're allowed to file as TTS for 2021 tax year (not MTM thou).

Safe side: don't file as TTS.

risky side: file with TTS and be prepared to fix it if the IRS complains.

but hopefully someone has the answer soon.

Re: How do I apply for Trader tax status (TTS) using TurboTax?

GeorgeM777 — Wed, 13 Apr 2022 23:11:58 GMT

Yes, you are too late to make election under Section 457 for tax year 2021. For 2021, the election to change your accounting to a mark-to-market accounting was due by April 2021, when you filed your tax return for 2020.

As a trader, without the MtM accounting, your gains/losses from securities trading are still considered capital gains and capital losses and consequently get reported on Schedule D and/or Form 8949 if required. Those gains and losses are subject to the same rules as capital gains and capital losses. You are correct that your trading losses offset your trading gains plus $3,000 of ordinary income. Traders, even though they are engaged in a business, do not pay self-employment tax.

You are correct that your Schedule C will only include your trader business expenses, such as internet, office rent if you have an office, and other expenses related to your business as a trader. Thus, it is entirely expected that a trader in securities with no MtM accounting status to have a Schedule C with no profit just losses.

A possible explanation as to why your audit risk may be high is that to meet the requirements to be a securities trader is a question of fact. Most people fall into the category of investors, few are actual traders, and fewer still are dealers.

@ebot

Re: How do I apply for Trader tax status (TTS) using TurboTax?

GeorgeM777 — Thu, 14 Apr 2022 17:12:44 GMT

Whether you qualify as a TTS is a question of fact. Let's assume that you do. If you have not made the election under Section 457 for mark-to-market accounting, then as a trader in securities, all of your gains and losses are capital gains and capital losses. Those capital gains and capital losses get reported the same way they do for investors, namely Schedule D and/or Form 8949. Because they are capital gains and capital losses, the same rules apply namely, losses offset gains plus $3,000 of ordinary income. Remaining losses are carried over to future tax years. The wash sale rule also applies. Traders in securities do not pay self-employment tax.

As a trader in securities, all expenses associated with that business are reported on Schedule C. The Schedule C will only contain expenses and no gross receipts or sales because the capital gains and capital losses have already been reported on Schedule D and/or Form 8949.

A different analysis applies if the trader has made a valid and timely election pursuant to Section 457.

@MilZero

Re: How do I apply for Trader tax status (TTS) using TurboTax?

ebot — Thu, 14 Apr 2022 19:26:16 GMT

Thanks MilZero. Super helpful.

I definitely qualify for TTS based on Forbes article I read....spent many hours, many trades per day, etc.

There's no way to go back and elect 457 MTM late, right? I've read it's set up like this on purpose so folks don't game the system. Personally, I just didn't know at the time.

Cheers.

Re: How do I apply for Trader tax status (TTS) using TurboTax?

MilZero — Sun, 17 Apr 2022 18:27:14 GMT

Thanks for taking the time to answer @GeorgeM777. Your expertise certainly cleared my doubts. I really appreciate it.

And yes, I wanted to start at the minimum with Schedule C this year (although I’m late for the MTM for 2021) since I do have some trader expenses (margin interest, subscription fees, etc.) which doesn’t provide the same advantage as the MTM when it comes to losses but it certain helps offset my taxes a little.

Re: How do I apply for Trader tax status (TTS) using TurboTax?

MilZero — Sun, 17 Apr 2022 18:32:15 GMT

Based on my research so far, I don’t think we can go back and amend for the MTM election. Like you stated, it seems those rules are in place to prevent traders from taking advantage.

However, I did find one article that stated “possibly amend a previous year’s tax return” but, I still need to keep looking more into that. Below is part of the article that you could grab and search it up (not sure if turbotax removes/allows other sites links to be posted, especially from competitors lol. I want to provide just enough info so other new traders can benefit from the tread):

"There are two major advantages of electing MTM:

Since all positions are marked to market (priced to year end market prices) at year end, there are no wash sales to calculate or report to the IRS.
If you happen to have a loss from trading greater than $3,000, you can deduct this loss from any other income, and possibly ammend a previous year's tax return and get a refund. "

Or perhaps @GeorgeM777 could also shed some light about “possibly” amending previous tax returns once approved for MTM.

Re: How do I apply for Trader tax status (TTS) using TurboTax?

LeonardS — Sun, 17 Apr 2022 19:05:42 GMT

No, you can not amend a prior year's return to include your MTM election. You can amend a prior year's return that was under your MTM election to make amendments to your MTM reporting.

Re: How do I apply for Trader tax status (TTS) using TurboTax?

ebot — Tue, 19 Apr 2022 02:07:15 GMT

Leonard, George, MilZero,

since 2021 (my first year trading real $$) resulted in losses approximately 20x the $3k loss deduction limit (without MTM status), a friend suggested looking in to filing as a partnership with my spouse and use a k-1 to allow us to flow the losses back to us. While filing a partnership would be new to me on turbotax, it does seem doable. Does that sound like a reasonable solution that could allow us take deductions on this large loss (quicker than 20 years at least)?

Re: How do I apply for Trader tax status (TTS) using TurboTax?

GeorgeM777 — Tue, 19 Apr 2022 02:36:21 GMT

No, not for your $20,000 as those losses were incurred before you formed your partnership with your spouse. As such, those losses remain with you as capital losses. You are correct in that you can offset $3,000 of ordinary income with your capital losses (if you file MFS, your ordinary loss offset is $1,500) and carryover the remaining amount of losses to subsequent years. However, you can offset your capital gains with your capital losses thus reducing the time it will take to fully extinguish your capital losses.

@ebot

Re: How do I apply for Trader tax status (TTS) using TurboTax?

ebot — Tue, 19 Apr 2022 17:18:09 GMT

Thanks, George.

Actually the 2021 losses are about $60k (20 times the $3k limit).

Does this mean that hypothetically, I could deduct $3k of losses for 2021, and then if I had gains of $57k in 2022, I could deduct that full $57k in 2022?

Re: How do I apply for Trader tax status (TTS) using TurboTax?

GeorgeM777 — Tue, 19 Apr 2022 17:36:50 GMT

Yes, that carryover loss of $57,000 will offset the 2022 gain of $57,000. Losses are applied in order so that long-term losses will offset long-term gains, and short-term losses will offset short-term gains. Then, if there still remains a gain after the losses have been applied in the proper order, whatever losses remain (whether-short term or long-term) are applied against the remaining gain.

@ebot

Re: How do I apply for Trader tax status (TTS) using TurboTax?

ebot — Tue, 19 Apr 2022 21:44:39 GMT

Wonderful. Thanks.