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

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

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-trader-in-commodities-self-employed-formed-a-sole/00/59103/page/2)

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?

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.

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.

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.

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?

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.

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.

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 

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

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.

Thanks for your valuable info.

nvrreddy

Thanks for your suggestion.

nvrreddy

I have the CD/Download version and I can go to forms and open the 4797 Form then go to Part II line 10 but the form does not let me enter anything in line 10 section.   I can enter numbers on line 14,15 and 16  which will total on line 17...   but I need to enter MTM total gains/loses on line 10. only to total on line 17.

I cannot figure out what I am doing wrong

It could be that your method needs a little adjustment.   If you right click in a box on line 10 of Form 4797, you should see a pop-up window where you can select the option to override.  Selecting override should allow you to enter the amounts you need to enter.  When you override in order to enter amounts not only on line 10 but any other form in TurboTax, you will void the TurboTax guarantee.  Thus, when entering information in this fashion, just double check that it is accurate.

While you may already know this, 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.  

@xmargman 

@GeorgeM777    Thank you for the quick response   In messing with the Right click and entering information I was able to back track and figure out the following which allowed me to enter the information without the override.   the key part of this is number 6.   again thank you for your help it got me to the correct spot!

1. Using your CD or downloaded version of TurboTax, open or continue to your return
2. Under the Business Items section select Start or Update beside Sale of Business Property
3. Select Sales of business or rental property that you haven’t already reported
4. Select Yes or No to question Do all of the following apply to the property you sold?
5. Enter the details of the sale
6. On the page Tell Us About Your Sale, select the Type of sale (To report on Form 4797 in Section II, select Held one year or less)
7. Enter the amount reported on Form 1099-B on the next input screen
8. To view Form 4797, go to Forms Mode by selecting the Form icon on the toolbar

@gmtrader1  Thanks for your reply, in Part 1V of 3115, Section 481(a) Adjustment, it not only ask you to enter the amount of adjustment, but also asked to attach a summary of computation and explaination of the method use to determine the adjust ment, any idea how should we go about it?  is a spread sheet showing all the open positions at year end which shows the unrealized gain/loss at 12/31 to be used as MTM suffice or there's any specfic format of that summary that IRS would be looking for?  

That spreadsheet should be just fine.  But make sure that the entries are easy to read and follow.  Confusing the IRS is never a good idea.

@zning 

Hi nvrredy. Can I have your help for filling 3115 for the first year. I have some question. A day trader must file 3115 for 2024 tax season for 2024 year if he want to be as day trader, am I right?

for a day trader individual, in the part Tax year change begins: would be 1/1/2024 but I do not know how many years I will be doing day trader so what can be Tax year of change ends?

I am individual what are the answers of part II 4&5, 13 ?Should I file Section 481(a)?

How about Schedule A? If yes should be filled, what is the present method and proposed method for a day trader?

What is the answer part I OF SCHULE A , #5?

Please lead me to file 3115

Sam

Thanks for asking. I am only writing you what I did. there is no guarantee that neither they are correct nor are applicable to you. Please do your own due diligence. This is only advice.

A day trader must file trader status selection with a letter and filled and signed form 3115 before tax filing dead line. For 2024, you must file before Apr 15  as an individual, or Mar 15 if you are business.

When you want to revoke, you must file revoke request with a letter before corresponding tax filing deadline.

3115 Part II answers depend upon what boxes you checked on top of Form 3115. For me it was individual and third box (accounting method)  other; sec 375(f) mark to market.

So correspondingly for Part (II) 4,5 & 13 answer is NO.

There is a sample 3115 from one GREGORY L. BUHROW, CPA PC  on line. You should get it by searching his name. Otherwise send me a note at nvrreddy917 at hotmail.

Filing of 481(a) is tricky. You have to calculate your assets as of 1/1/2024 and enter that amount in Part IV (26).

I know there are places where you can calculate those online. Otherwise you may have to call turbo tax help.

I entered 0 because I am staring fresh on 1/1/23.

I hope what I wrote here will help you.

Thanks

@Sam Hopi The election and 3115 must be filed with your 2023 return on or before its original due date. If you can't file by 4/15/2024, the election and 3115 can be included with a timely filed extension.

tax year of change ends 12/31/2024

part II line 4 you should be able to answer. will you trading business end in 2024 yes or no?

part 11 line 5  section 381 is only for corporations which you are not.

part II line 13 is NO you are not changing your overall method of accounting. something like reporting all income and expense items on the accrual basis method vs the present case basis method.

the 481(a) adjustment is the difference between the market value of your trading securities on 12/31/2023 vs their tax basis. a year-end broker's statement probably has both so you can attach it as support. be wary. review it. If you trade publicly traded partnerships, your broker's statement probably won't have your tax basis. for those you may need the k-1. also, some dividends you received in 2023 might be a return of capital that reduces your tax basis in the security and likely won't be reflected on the December statement.   

***

a negative 481(a) loss must be taken into account in doing your 2024 return a positive 481(a) must be spread over 4 years unless $50K or less see part IV question 28 

*****************

as note Schedule A does not apply 

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besides the 3115 a statement must go along

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.

****************************************************

Automatic change requests. Except if instructed differently,
you must file Form 3115 under the automatic change procedures
in duplicate as follows.
• Attach the original Form 3115 to the filer's timely filed
(including extensions) federal income tax return for the year of
change. The original Form 3115 attachment does not need to be
signed.
• File a copy of the signed Form 3115 (duplicate copy) with the
IRS National Office at the address provided in the Address Chart
for Form 3115, later, no earlier than the first day of the year of
change and no later than the date the original is filed with the
federal income tax return for the year of change. This signed
Form 3115 may be a photocopy. For more on the signature
requirement, see Name(s) and Signature(s), later. Alternatively,
the duplicate copy of the signed Form 3115 may be submitted by
fax.
The IRS does not send acknowledgments of receipt for automatic change request

see 3115 instructions for where to file the copy

https://www.irs.gov/pub/irs-pdf/i3115.pdf 

********************************************

if you are unsure of anything engage a pro. Blowing the election can be extremely costly.  

*************************

Please note I have not recently filed a 3315 for a trader so the above is based on reading the  3115 instructions and what I did for a trader a long time ago. the form has changed since then. 

you might want to read IRS PUB 550 (2022) section called "Special Rules for Traders in Securities." 

https://www.irs.gov/pub/irs-pdf/p550.pdf  starting on page 67

Hi Mike and thanks for your response.  All my words are about Mark-to Mark Day Trader. I want to start day trading 1/1/2024 as individual. On the top of the 3115 asks: Tax year of change begins, for me it is 1/1/2024 but I am not sure if I want to be as day trader for 2025, 2026 so what would be for Tax year of change ends??

You said: 

If you can't file by 4/15/2024, the election and 3115 can be included with a timely filed extension.

tax year of change ends 12/31/2024. I confused about 12/31/2024, extension due date is usually around Oct 16 not the end of the year. Let me know, If I want to take extension, form 3115 should file on Oct or when I apply for extension on April 15?

1. What another document should be attached for duplicate when I mail it? Should I attach 1040 all papers along 3115 when I mail it to different address? what is the statement I heard it about that comes with 3115? Please notify me!
2. Should I get an approval from the IRS? How can I get it?
3. Do I  sign 3115 when I e-file it that apparently should be attached to my 1040 tax return 2023 as a pdf? Right?

4. On Part ll  line 7a,  my  answer is Yes and for 7b my answer is  Not under exam ! Am I right?

5. What is the answer of line 25 section IV 481(a) ? Yes or No . Since I do not know about Cut-off basis if it includes for a Day Trader?

6. If I enter Yes, it does not ask me the amount of line 26 but when I enter No, ask me the amount!!!

If I will start 1/1/2024 as Day trader what would be answers above question?

As you mentioned:     the 481(a) adjustment is the difference between the market value of your trading securities on 12/31/2023 vs their tax basis. What does it mean if I want to be a day trader as of 1/1/2024!!

A year-end broker's statement probably has both so you can attach it as support. be wary. review it. If you trade publicly traded partnerships, your broker's statement probably won't have your tax basis. for those you may need the k-1. also, some dividends you received in 2023 might be a return of capital that reduces your tax basis in the security and likely won't be reflected on the December statement.   

***

a negative 481(a) loss must be taken into account in doing your 2024 return a positive 481(a) must be spread over 4 years unless $50K or less see part IV question 28 . I need your help to better understand it.

For me who wants to start 1/1/2024, does it matter my assets value at the 12/31/2023? May I have an example please by any numbers.

How about expenses? Should  I  file Sch C and just enter expenses  and your net income will be a negative amount? 

would be greatly appreciated it!