First year active trader (Mark-to-market), how to enter 481(a) adjustment?

[DD Walker]

I elected active trader (MTM) accounting with my 2020 tax return. So tax year 2021 is my first year switching to MTM account. I know I need to do 481(a) adjustment for my open positions at the end of 2020. But I'm confused about where to enter the adjustment into my 2021 tax return. 

Should I enter the adjustment as a separate entry in Line 10 of form 4797?

Thanks for the help.

[ColeenD3]

Do you mean Section 475(f)?

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) 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.

Enter your information in Sales of Business Property,

1) Wages and Income

2) Other Business Situations

3) Sale of Business Property

4) Other Property Sales

5) Select Sales of Business or Rental Property that you haven't already reported

[DD Walker]

Yes, I meant Section 475(f) for my stock trading activities.

I made the MTM election last year, and this is the first year I report my trading Gain and Loss using this method.

In another thread, DaveF1006 explained how to enter these gains and losses in Part II of Form 4797. (https://ttlc.intuit.com/community/business-taxes/discussion/will-turbo-tax-work-if-i-am-a-full-time-...)

I held some stock positions in 2020 that are not closed by 12/31/2020. For MTM reporting to work, I need to do the 481(a) adjustment and file 3115. 

My question is how I can enter that adjustment in my tax return. Do I report this adjustment as another entry of Gain and Loss in Line 10 of Form 4797?

[fanfare]

I don't think you can do that.

Positions in an investment account must be kept separately from positions in a Trader's account.

Separate brokerage accounts should be used.

you'll have to report those outstanding positions on Schedule D when you close them.

[DD Walker]

Hmm, Schedule D. 

This is the first time someone said that these positions should be reported on Schedule D. 

I did quite some research on this topic. The following are a couple of helpful web pages:

http://www.tradelogsoftware.com/resources/mark-to-market-form-4797/#form-4797

https://www.optionstaxguy.com/mark-to-market

They both mentioned Section 481(a) adjustment for the first year. But they didn't specify where this adjustment should go to. (You need to file Form 3115. But this form doesn't affect your actual tax return.)

Also in this post (https://support.tradelogsoftware.com/hc/en-us/articles/[phone number removed]-Additional-MTM-Reports this url doesn't work, because the forum replace a number string with the "phone number removed", it should be 115-004-507-954 without the dashes) it says: "The totals from the Gains & Losses report plus your total section 481 adjustment are your actual trading gain (or loss) for the year. The IRS, however, wants to see them broken down this way."

So I'm still thinking I should put it in 4797.

[ColeenD3]

All of your positions may not apply to the MTM election. It is possible to have some trades meet the qualifications and be entered on Form 4797. Any trades that are still long-term are investments entered on Schedule D. 

Here is a partial answer from @AnnetteB6 that helps to explain the difference.

If you have not elected and submitted the Mark-to-Market (MTM) accounting method, then go to Forms Mode to view your Schedule D.  Line 16 of Schedule D will show the overall gain or loss being reported on your return. .  Otherwise, you must do some math outside of your return to determine only the overall gain/loss from transactions associated with your business as a ‘trader’.  Transactions as an investor (for example, selling a long-term holding) cannot be considered to be income associated with your business as a trader.

If you have elected and submitted the MTM accounting method, then go to Forms Mode to view your Form 4797.  If you have no other items reported on Form 4797 except for your trader activity, then the ‘trader’ gain is the amount from line 18b.  Otherwise, you will need to calculate the total gain for your trader activity only to use in the home office instruction below.

[TV107]

Where did you end up putting it?  I'd like to know the answer for next year for individual return and partnership return?

It can't be as a regular expense because then SE tax would be reduced so I'm thinking it has to be as another line on the 4797?  Am I Wrong?

[gmtrader1]

Hi DD Walker,

Did you ever get a satisfying answer to this? I have the same question about exactly how to input the 481(a) values, but I'd like more clarity as well.

[nvrreddy]

Hi DD Walker,

I have same problem. I am also a second year full time trader.

I appreciate if you can share how to enter in Form 4797.

[GeorgeM777]

In TurboTax, you can report on line 10 of Form 4797 all gains and losses from sales and dispositions of securities or commodities held in connection with your trading business, including gains and losses from marking to market securities and commodities held at the end of the tax year.  However, you need to use the CD or download versions of TurboTax because you will need to go into Forms mode to enter the relevant information on line 10 of Form 4797. TurboTax does not support, in its step-by-step question and answer format, the information that you will need to enter on line 10 of Form 4797.  Forms mode is not available in the online version of TurboTax.  

Forms mode in TurboTax CD/download is activated by selecting "Forms" in the upper right corner of your screen.  Once selected, in the left margin, find Form 4797, select it, and then use your cursor to enter your information on line 10.  If Form 4797 is not in your list of forms, then select "Open Form," enter Form 4797 in the search bar, and select Form 4797.  

Additionally, for securities traders who have elected mark-to-market accounting (Section 475(f) of the Internal Revenue Code) IRS instructions for Form 4797 provide that the security trader must attach a statement to their return using the same format as line 10, showing the details of each transaction. Moreover, the statement must separately show and identify securities or commodities held and marked to market at the end of the year.  TurboTax does not support the creation or importation of the trader's statement.  Thus, you will need to separately prepare your statement and attach it to your return. Your completed return will need to be paper mailed to the IRS.  

@nvrreddy 

[nvrreddy]

Hello GeorgeM777,

I thank you very much for your detailed and very informative reply.

As you suggested in third para of your reply, I have prepared accodingly

i) a statement in the same format as for line 10, IRS Form 4797 for all transactions

ii) a statement identifying all securities on 12/31/2022 and marking to market at the end of the year for MTM adjustment.

But the difficulty arose in my case because on 1/1/2022, it so happened that all my account was in cash. So, my initial question that resulted in your response is, How I prepare 481(a) adjustment in my specific situation. I need a figure to enter in Part IV (line 26) of IRS Form 3115. Can I enter "zero" because none is a security.

If they were all in securities like stocks,  I would have marked them to market and obtained MTM adjustment at the beginning of the year.

So please let me know if you know a solution

Sincerely,

nvrreddy

[TV107]

if your account was in cash,  line 26 is zero, there is no section 481(a) adjustment

[gmtrader1]

Yes, having gone through this process last year, you would just put 0 for the adjustment if no securities were held in the account in question. 3115 basically just announces to the IRS that the account is going to be MTM from this year forward (you only file it once unless you want to change the accounting method again).

For anyone else who's confused about what the 481(a) adjustment is for traders, it basically tells the IRS, "This is the total net gain/loss of the positions I'm carrying over if I were to sell them at the end of the year before I change the accounting method."

As a trader, I would suggest using software like Tradelog to easily create the necessary accounting forms while just inputting the net totals into the TurboTax software for form 4797.

A lot of the jargon used by accountants and the IRS is just to gatekeep. Like in many disciplines, the abstract vocabulary is used to make you more dependent on "experts in the field" for explanations.

[nvrreddy]

Thanks for your valuable info.

nvrreddy

[nvrreddy]

Thanks for your suggestion.

nvrreddy