MTM accounting 475f- For Traders

[sam992116]

If someone is filing return as Trader (with Trader Tax Status), they may elect to use 475f (MTM accounting to over come WASH sales).

Q:  My understanding is in that case From 4797 is used for gain and losses?

Q: If someone is claiming/filing 475f, they have to report year end Unrealized gain and losses as well. Correct?

Q: Do they have to only report year end Unrealized gains and losses or have to pay tax on that as well?

[GeorgeM777]

Question 1 - Yes.  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.  

Question 2 and 3 - Not exactly.  You don't separately report the unrealized gains or losses, rather any position that you hold at year end is deemed to have been sold for its fair market value on the last day of the year.   In other words, every position is marked to market and is deemed to have been sold at that price at the end of each year.  Thus, there are no unrealized gains/losses in a trader's account (that is the account that has made the 475(f) election).  All gains and losses are realized and reported on the trader's tax return.   The positions that were marked to market then take on a new cost basis.  Arguably, this is one of the downsides to MtM as it accelerates recognition of gains and losses.  

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.  

@sam992116 

[sam992116]

thanks

[sam992116]

with 475 F election I will lose long term capital gains and I have pay all taxes on Net by year end whether realized gain or unrealized gains.

Q: If I am electing or claiming myself to be a Trader (Hence Trader Tax Status with trading expense deduction on Sch C, do I HAVE to elect and file 475 F (MTM election)?

Q: If I am NOT electing MTM election (no filing of 475 f), would it jeopardize my TTS and my trading expense deduction on Sch C?

Question I trying to understand is with Trader Tax Status (TTS), 475 f (MTM) election is optional not a requirement for a Trader?

I don't have too much WASH sales last year and I will be paying much more in tax, as TAX saving from WASH sales are lower than long term gain tax saving PLUS un realized gains which will be become taxable with 475 f election/filing with tax return.

[GeorgeM777]

Question 1 - No.  There are Traders who have not made the MtM election.  They report their trading/business expenses on Schedule C.  MtM is an election which a Trader can elect if they want to adopt mark to market accounting for their trading business.  There is no requirement that a Trader must elect MtM under Section 475(f) of the IRC.  It is just an option or rather an election that a Trader can make.  

Question 2 - No.  Whether you meet the requirements to be a Trader--as opposed to just an investor--is a question of fact.  It does not matter whether you have elected MtM or not.  A non-exclusive list of the factors that distinguish a Trader from an Investor are the following: 

1. the taxpayer's investment intent,  
2. the nature of the income to be derived from the activity, and 
3. the frequency, extent, and regularity of the taxpayer's securities transactions.

Thus, a taxpayer's activities constitute the trade or business of trading only where both of the following are true: (1) the taxpayer's trading is substantial and (2) the taxpayer seeks to catch the swings in the daily market movements and to profit from these short-term changes, rather than to profit from the long-term holding of investments. 

@sam992116