Day Trading taxes

[nuclearapple]

Hi @fanfare

On form 4797, Part II - Where do I mention "Trader see attached"? Do I do that in Section 10?

I had a loss from my trading activity, where would I enter the totals (which line on Part II Form 4797)?

Would TT automatically link this total to form 1040? 

Thank you!

[fanfare]

all that  goes on line 10. but see also line 1.

If you do it correctly, the form will be attached to your tax return.

[fanfare]

If I had to do this, I would probably e-File,

then use form 8543, check the box for Form 8949

but strike out 8949 and write in 4797.

IRS may or may not accept this. I don't know.

[JFandl]

The other problem with using Turbo tax (I have 2020 Home and Business edition) is that when all of your trading is reported on 4797, you will not show income on your schedule C by default, only expenses.  This causes an issue for your home office deduction. Turbo tax will not allow you take the Home office deduction if you show zero income (on Schedule C).

Day Traders are allowed to deduct home office expense, unlike a W2 employee.

[fanfare]

You can't deduct expenses when there is no net positive income on Schedule C.

Being a Day Trader, you shouldn't be losing  money.

[JFandl]

I'm not sure if I wasn't clear but your information is not correct.

First, yes, you can deduct expenses on Schedule C even if you do not show a positive income. It will be reported on your 1040 as a NOL which can offset other sources of income or act as a carry forward NOL if you have no income.  You can also carry back a NOL 5 years with the Tax cuts and Jobs act of 2017. 

Regarding the day trader losing money - of course you shouldn't be losing money, however most do. If however you are net positive, Turbo tax still poses a problem which was my entire point:

A mark-to-market trader will report the following:

Gains are reported on 4797 Part II

Expenses are reported on Sch C

Schedule C will show $0 net income (because all gains (or losses) are reported on 4797) which Turbotax prevents you from deducting the home office deduction because the IRS does not allow you to deduct for home office if you have no income from the business, even though all your income is reported on 4797 instead.

This is a limitation (flaw) of Turbotax that is allowed by the IRS for Day Traders who are TTS.

[fanfare]

I went back and looked at Schedule C in TurboTax 2018.

You're right you can show expenses on Schedule C with no income.

Regarding the home office deduction, I didn't try that one.

[tagteam]

Was the box in the screenshot below checked?

[JFandl]

Yes, it was checked. When I removed the income as a test, TurboTax had a message to say it will remove the home office deduction because it cannot be claimed. (Not word for word, this is what I recall)

[tagteam]

The program will not allow me to take the simplified deduction at all.

It does, however, allow actual expenses (without any income whatsoever). 

[Note that the foregoing is applicable to the 2020 version of Home & Business]

[9devine]

I have a related question. I made the MTM election (included statement of making an election under section 475(f)(1) or (f)(2) of the Internal Revenue Code)  with my 2020 return for year 2021. I believe the next step is file Form 3115 in 2021 tax return. However, I do not want to file by this method anymore for 2021.

is it OK to file by regular method instead ?

[fanfare]

IRS says:

"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."

If you haven't filed those other required forms, its not clear your election is valid.

I'd attach a statement saying you are revoking the election. 
OR, talk to your tax preparation professional familiar with this area.

[tagteam]

@9devine 

See Topic No. 429 Traders in Securities (Information for Form 1040 or 1040-SR Filers) | Internal Revenue...

Non-filing of the Form 3115 mentioned above won't invalidate a timely and valid election.

As @fanfare indicated, file an automatic request for revocation under Revenue Procedure 2019-43, Section 24.02.

[JFandl]

The first question I would ask is why select to go that route and then change your mind? You can report non-trading gains under regular accounting methods even after mark to market as long as investments are separate from trading activities. 

The next thing I would do is see what the rules are if you fail to file a timely 3115 to change accounting method. That may void your "intended election"

[tagteam]

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@JFandl wrote:

.....see what the rules are if you fail to file a timely 3115 to change accounting method. That may void your "intended election"

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I posted the rule:

Non-filing of the Form 3115........won't invalidate a timely and valid election.