Day Trading taxes

[HeadSpade]

Hi there,

I'm day trading from this year, and I am located in NY. I know that in order to write off expenses I need to fall under Trader Tax Status, which I don't think will be a problem. But do I need to open LLC in order to take advantage of all the write offs? 
Also let say I made 100k, but to make that I lost 10k. Do I get taxed on 90k or IRS don't care about my draw down?
I'd like to do taxes on my own in turbo tax for next year, so if someone could direct me on how to do it I'd really appreciate.

Thanks

[ColeenD3 · Accepted solution]

No, you do not need an LLC. However, you would have had to made a Mark to Market election.  

The Mark-to-Market Election  

Traders can choose to use the mark-to-market rules, investors can't. If a trader doesn't make a valid mark-to-market election under section 475(f), then he or she must treat the gains and losses from sales of securities as capital gains and losses and report the sales on Schedule D (Form 1040 or 1040-SR), Capital Gains and Losses (PDF) and on Form 8949, Sales and Other Dispositions of Capital Assets (PDF) as appropriate.   When reporting on Schedule D, both the limitations on capital losses and the wash sales rules continue to apply.

However, 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 - see above) 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.   A trader 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 the election becomes 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: 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. 

Day Traders

[vdamy]

Last year before April 15th, I submitted the form with Fidelity for 'mark to market' election. How do I now show my losses from 2019 for taxes? The 1099 from Fidelity does not have any indication of 'mark to market' election.

[RobertG · Accepted solution]

After declaring yourself as a securities trader (if you objectively meet the criteria) you will then need to print and file your tax return on paper (not e-file) and attach a statement to the back of it declaring what is known as an IRC (Internal Revenue Code) Section 475(f) election.

If you properly made the mark-to-market election with the IRS, you should report all gains and losses from trading as ordinary gains and losses on Part II of Form 4797, instead of as capital gains and losses on Schedule D. In that case, securities held at the end of the year in your business as a trader are marked to market by treating them as if they were sold (and re-acquired) for fair market value on the last business day of the year.

You will manually add a Form 4797 to your tax return, and enter your net total gain / loss in Part II of Form 4797, using the TurboTax smart worksheet.

Please note that you will want the TurboTax desktop software to correctly do this; the TurboTax online program will not be adequate, because you will not have access to the "Forms Mode" of the software.

Traders report their business expenses on Schedule C. Commissions and other costs of acquiring or disposing of securities aren't deductible but must be used to figure gain or loss upon disposition of the securities.

This question was previously answered by GeoffreyG

@vdamy

[lauriofam5]

Robert, 

Your information on what I need to do is priceless. I read Coleen's information online and IRS.gov but had no idea that I would absolutely need the desktop version (used online last year).  I am very familiar with online and desktop versions but am UNFAMILIAR with HOW to file myself using TurboTax to do it.

I have searched "forms mode" before so now I know where to look when I approach tax time next year to prep for the following year. 

I have come to a decision after reading your post. I can't say thank you enough for explaining very clearly on the steps I need to take followed with a "line break" between steps.

Very straight to the point on what to do AFTER my declaration as a day trader.

Thanks,

Angel

[fanfare]

TurboTax can easily generate the Form 4797 for you,

When you're ready to go, maybe next year, I'll post the instructions.

But until TurboTax allows attachment of TTS transaction detail with e-File, you'll have to file a paper return.

OR use some other tax software vendor. We're not allowed to name them here.

[smarw262]

Hello, I am in the process of making an election for Mark-to-Market Accounting and a statement looks like below.

1. I am making an election under section 475(f) of the Internal Revenue Code.
2. The first tax year for which the election is effective 2020
3. The trade or business for which you're making the election.

Questions:

• I am electing for M-T-M accounting for year 2020 and will print out the federal return and at the last page of the return I will attach above statement. I wonder the M-T-M paper at the last page will not be ignored or not overlooked by IRS?
• I do not have any S-corp or any corp, what should I write for ‘The trade or business for which you're making the election’. Shall I just write my name?
• Me and my spouse are filing the return jointly as Married. Does an individual make an election or both together in such case? If both need to make an election, then first point should state as ‘ We, <Both filers first and last name> are making an election under section 475(f) of the Internal Revenue Code.

Thank you in advance for the help!

[trader tax]

If I file the tax return as a day trader w/ MTM, do I need to still import whole transactions to the e-file (Schedule D or other) or mail the printed version?

[KristinaK]

No, you do not need to report them on Schedule D.

If you made a timely and valid mark-to-market election under section 475(f), then you will treat the gains and losses from your trading activity as ordinary and therefore report them on Form 4797, Sales of Business Property. If you have expenses associated with that trading activity, you can deduct them on Schedule C. 

[GrainofRice]

Hi, I was a little confused regarding mark to market as far as the deadline for making that election. I began daytrading in 2020, but did not file anything regarding mark to market yet and it is now November. Can I still make that election when I file my 2020 taxes, or is it too late? Thanks!

[tagteam]

@GrainofRice Answered earlier:

A trader 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 the election becomes 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: 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. 

[eesme]

Hi Robert,

Thank you for the info you provided below.

Would you be able to walk me through step by step on how to file Schedule C and form 4797 in turbo tax business version ?

I have desktop version of the software and I filed MTM election last year (2020).

Thank you.

[marwanfrance]

Does day trader has to state( MTM)mark to market every single year ? 

I have done that statement couple years ago 

[Mike9241]

@marwanfrance  no. the first year statement is a permanent election. once properly elected M-T-M must be used every year for trading activities.  

[tagteam]

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@marwanfrance wrote:

Does day trader has to state( MTM)mark to market every single year ? 

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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.