Mark to market election 475(f) on trading profits through an LLC

[jl3757]

Hello,

I have a question regarding how to handle my trading profits through an LLC.  This year I have been trading through an LLC brokerage account in a manner consistent with a qualified trader - trading daily, in size, and realizing profits intraday or the next day.  I want to use the profits from this activity as active income against which I can deduct business expenses and hopefully contribute to a solo 401k.  One complication is that upon formation of the LLC account, I collateralized it with a bunch of stock that I have held for years instead of cash.  This stock is certainly securities that are held for investment as opposed to held for trading.

My question is:  do I have to make the 475(f) election in order to get the profits from the short term trading onto my schedule C?  For the most part at the end of the year, I will only be holding a small amount of the securities to mark to market anyway, any profit would have been realized. 

And If I have to make the election, can I make the election only apply to the short term instruments and keep the dividends and capital gains from small sales of the held for investment stock on my schedule D?  It would be a tax disaster to make the election and have the unrealized gains from the stock marked to market and taxed as active self-employment income.

Lastly I also run a similar strategy in my personal (not LLC) brokerage.  I would like to keep that profit on my schedule D as well; and only have the profit from short term trading through my LLC account on my schedule C.  Would this be possible if I take the 475(f) election?

This forum has been so helpful to me in the past, just wanted to say thanks to all the contributors here!

[Anonymous_]

I'm going to page @Mike9241 but, first of all, a single-member LLC (without an election to be treated as a corporation) is disregarded for federal income tax purposes; it is treated as a sole proprietorship.

Also, your P&L from trading, with an MTM (475(f)) election, will not be reported on a Schedule C (which will be used for trading expenses) but will be reported on Form 4797. 

You can still have "long-term" accounts.

[jl3757]

Thanks @Anonymous_  and @Mike9241 ,

Does this mean that I won't be able to deduct things like schedule C trading expenses, health insurance premiums, and home office expenses since it is not on the schedule C?  If that is so would I have needed to take an S-Corp election to be able to deduct those items?

Thanks!

[Mike9241]

assuming you qualify for the 475(f) election is must be made with the original return for 2023 on or before its due date or with a timely filed extension for the 2023 return to be effective for 2024.  trading profits/losses get reported on form 4797 not schedule C. trading expenses get reported on schedule C. 

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A taxpayer may be a trader in some securities and may hold other securities for investment. The special rules for traders don't apply to those securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day he or she acquires them (for example, by also holding them in a separate brokerage account - you can understand that having investments and trading securities in the same account could cause reporting problems with the brokerage but check with then for what they say). if you don't timely designate a security as being for investment the profit or loss is ordinary (trading) even if the security is held long-term 

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a single member LLC is disregarded so there are no issues that it would cause you in making a valid 475(f) election

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IRS tax topic 429

Gains and losses from selling securities from being a trader aren't subject to self-employment tax.

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As a trader, you 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 you intend the election to become 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:

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

If you’re a new taxpayer that wasn’t required to file a tax return for the prior year, you may make the election by placing the above statement in your books and records no later than 2 months and 15 days after the first day of the year for which you intend the election to become effective. You must attach a copy of the statement to your tax return for that year.

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since you are using securities already owned as collateral, my opinion is that they would be taxed as investment gains/losses. you may want to consult a tax pro to get their opinion.  

[mukundaa]

How can I do the following ?

I am new taxpayer for LLC. 

In which books or how can I enter in quickbooks ?

Is there option in quickbooks to enter ?

If you’re a new taxpayer that wasn’t required to file a tax return for the prior year, you may make the election by placing the above statement in your books and records no later than 2 months and 15 days after the first day of the year for which you intend the election to become effective. You must attach a copy of the statement to your tax return for that year.

[DavidD66]

You don't need to actually put the statement in QuickBooks.  Print a copy of the statement, sign and date it (it must be dated no later than March 15th).  Scan the signed copy and save on your computer.  If you have paper files, file the hard copy.  

You said you are a "new taxpayer for LLC".  The exception to making the Mark to Market 457(f) by attaching a statement to your tax return for the year prior to year you want it to go into effect doesn't apply if you if you filed a tax return, but didn't have an LLC.   It only applies if you personally were not required and did not file a tax return.  You can still be a trader, you just can't use mark-to-market.  

[mukundaa]

Thanks David

I have done exactly this. Printed and signed and will attach it to tax reurn next year when I file. This is new entity or new llc created.