Day Trading taxes

[bertoC]

Hello,

Thanks fore all this useful information... I am assuming that valid election also imply that the status is accepted by the IRS the first time that the election is selected. What will be the scenario if I have losses to deduct but the IRS does not grant the status... Would I be subject to penalties on the wrong deductions?

Thanks.

[Mike9241]

the IRS has no way to determine from making the election whether or not you actually qualify.  if you are audited, likely the only way the IRS could determine that you actually qualify or not and also assuming you go to court over this and lose or decide not to contest the IRS decision. your gains/losses would be treated as capital gains/losses and you would be denied schedule C deductions. besides the taxes there would be penalties and interest.  

if you are concerned about this, you should consult a pro for their opinion.  but it's only an opinion,  the tax courts even SCOTUS if you go that far have the final say. 

[pentazhang]

Hi Coleen,

Same question. To file trader tax status for 2020 with MTM election, in addition to 

1. Schedule C to report business expenses;

2. Part II of Form 4797 for ordinary gain and loss

Do I still need to file form 1040 or only the above two would be enough?  Thank you!

[DianeW777]

Yes, you do need to file Form 1040, which will include Form 4797 and Schedule C. As reference for you use the following link:

• IRS Topic 429-Traders in Securities
• This provides the information to enter on your statement that is attached to the return.  Simply stated you can use the following statement:
  •  Statement of the mark-to-market election under Internal Revenue Code section 475(f) for a trader in securities. 

As noted above by @ColeenD3, use TurboTax CD/Download version to complete your tax return and the information posted here for your convenience.

• You will manually add a Form 4797 to your tax return, and enter your net total gain / loss in Part II of Form 4797, using the TurboTax smart worksheet.
• Please note that you will want the TurboTax desktop software to correctly do this; the TurboTax online program will not be adequate, because you will not have access to the "Forms Mode" of the software.
• Traders report their business expenses on Schedule C. 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.

[pentazhang]

Thanks so much for the information, Diane. I used to use Turbotax online program. Can I transfer my previous year data to the download/desktop version?

[DianeW777]

Yes.  TurboTax has details on how to make that happen so that you can complete your 2020 tax return. 

• Transfer last year's return data to TurboTax CD/Download for 2020
• How to transfer my online return to a .tax file (use this for your 2019 return before trying to transfer your data to 2020)

[pentazhang]

It is very helpful, Diane. Thank you very much!

[lauriofam5]

Diane your post was very helpful, thank you.

Can I continue to use TurboTax desktop every year AFTER I have made the necessary mark-to-market election for this year.

I am under the impression that I must go to a CPA for tax year 2021 once I paper file this year (for 2020 taxes).

[fanfare]

If you plan to make the MTM election,

it is highly recommended that you consult your knowledgeable CPA before you do so.

The election is irrevocable without IRS approval.

[fanfare]

most persons I see on this forum who want to go MTM

• don't understand the concept and what is involved, nor how to file their tax return.
• don't meet the stringent  qualifications for Professional Trader Status.
• will be audited and have their election overturned by IRS.

You can file as a Day Trader without making the MTM election.

Even that is hard to qualify for and will probably trigger an audit.

[BruceEdwardsEA]

Thank you for this very clear, concise answer which corroborates my own research on Trader status.  I have a technical question, can I complete this election and E-File it with my return through the Turbotax download desktop system?  Or do I have to file a paper return, which I would prefer not to do?

[ColeenD3]

TurboTax does not support the MTM process. You can download the form from IRS. 

MTM Election

Refer to the Form 1040, Schedule D Instructions, 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.

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 2018-31. In addition to making the election, you'll also be required to file a Form 3115.pdf, Application for Change in Accounting Method.

 Publication 550 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.

[Jagan]

Hi ColeenD3,

Regarding the 475 election,  I understand that i have to file a statement of election along with the return by April 15, 2021. I appreciate your response to my following questions:

a) Is it okay to efile my return but manually mail by April 15, 2021 the paper copy of the extension form 4868 and attach the below statement along with 1040V/tax payment?  As my return has 800 pages and I would like to efile instead of paper file.  

b) Is the below statement of 475(f) election complete and acceptable by IRS or do i need to clarify anything else?

                                                     Statement showing 475(f) election for the year 2021 

Names of self and wife

SSNs of both

Address:

1. That I am making an election under section 475(f);
2. The first tax year for which the election is effective is 2021 and
3. The trade or business for which I am making the election: I am making Mark to Market election only for my Stock Options trading business. My long term investments are not part of MTM election as those are held for investments and not trading. "

Thanks, 

Jagan

[fanfare]

It seems IRS wants the election statement attached to Form 4868.

This is a form that has to be filed before April 15 to be effective.

As does the election.

As Spock would say, it is illogical to file a request for extension of time after you have already e-Filed.

BUT, in some cases, it may be advantageous to do so.

[Jagan]

Thanks fanfare. So that means it's acceptable to IRS if I file Form 4868 by April 15 and attach 475 statement. Are we 100% sure?

If I efile my return already, just realized there is form 8453 'U.S. Individual Income Tax Transmittal for an IRS e-file Return' which can be possibly be used? Though the form does not specifically mention 475 statement in it. If this can be done, it would be a simple process: efile in turbotax and manually file form 8453 with 475 election statement. thoughts please? 

Also, are we 100% sure if IRS has accepted similar forms in the past and would not reject 475 statement?   

Regarding my other question:

b) Is the below statement of 475(f) election complete and acceptable by IRS or do i need to clarify anything else?

                                                     Statement showing 475(f) election for the year 2021 

Names of self and wife

SSNs of both

Address:

1. That I am making an election under section 475(f);
2. The first tax year for which the election is effective is 2021 and
3. The trade or business for which I am making the election: I am making Mark to Market election only for my Stock Options trading business. My long term investments are not part of MTM election as those are held for investments and not trading. "

Appreciate your response. 

Thanks. 

Jagan.