Does a person who qualify for Trader Status in 2021 but did not select 475f MTM for 2021 take QBI deduction?

[Lucy196]

Dear all,

Does a person who qualify for Trader Status in 2021 but did not select 475f MTM for 2021 take QBI deduction?

When google internet, I found a trader who qualify for Trader Status below to The SSTB (specified service trade or business)  category.  So if a trader has capital gain in 2021,  he/she can enter expense deduction on Schedule C.  Schedule C will show negative number.  My Question is: can this trader take QBI deduction? If so, is any way to take this QBI deduction in TurboTax?

Thanks for help, I am very appreciated your kind help.

Lucy

[LeonardS]

You do not have to make the selection for MTM to take the QBI deduction.  Yes, the QBI deduction will be calculated by TurboTax.

[Lucy196]

Hi LeonardS

Thanks a lot Leonard!

TurboTax calculate the QBI as zero because it take negative number in Schedule C which has only expense,

So any workaround to this issue? Thanks

Lucy

[ColeenD3]

No. You did not have any income on which to base it.

[olio1987]

Lol one expert says “yeah you can!” Then another expert says “no you can’t” 

which one is it? Technically capital gains are in schedule D for your day trading securities and since you didn’t select MTM but qualify as TTS I also wonder how to get QBI deduction. 

I can’t find the answer anywhere and turbo tax program online isn’t letting me apply for it unless I have income on schedule C

is there a way to do this on the desktop download software version ? 

[GeorgeM777]

Traders in securities are indeed engaged in a business activity and thus, if eligible, can get the QBI deduction.  In this regard, the IRS has stated:

• Special rules apply if you're a trader in securities, in the business of buying and selling securities for your own account. The law considers this to be a business, even though a trader doesn't maintain an inventory and doesn't have customers. (underline and bold added)

 The prior experts, @Leonard Smith and @ColeenD3, were discussing different matters in that the former was speaking about the QBI deduction generally, and the latter was addressing the fact that with zero income, there would be no QBI deduction.

A trader that does not make an election under section 475, must treat all gains and losses as capital gains and capital losses and report same on Schedule D and/or Form 8949 as appropriate.

The above information was obtained from the IRS webpage at the following link: Traders in Securities

@olio1987

@Lucy196

[olio1987]

Thanks @GeorgeM777  ….But isn’t capital gains from day trading and qualifying as TTS considered income ? Since TTS is considered a self employed business ?

This is where the confusion is. Again we didn’t elect MTM. And because of this we need to file our capital gains schedule D from our 1099B, and if by law this is considered income, why can’t I qualify for QBI? And if we do qualify for QBI , how do we make your program apply it ?

Raising the question again: is it because we didn’t elect MTM 475 last year ? Or is there a way to do it in the desktop version of your program through forms mode ?

[GeorgeM777]

Yes, your capital gains are indeed a type of income.  To further clarify the prior post, you will complete a Schedule C Profit or Loss From Business; however, your Schedule C will only include your expenses associated with your trading business.  Your income, that is, the capital gains (and capital losses) will be reported on Schedule D and/or Form 8949.  Because you have not made the section 475 election, you don' t get the benefit of treating any capital losses as ordinary losses and further, you won't be preparing a Form 4797 as only those traders who had timely made the section 475 election complete Form 4797.  Your gains and losses from being a trader are not subject to self-employment tax.  

Because your Schedule C will only include expenses, (but no income because that has already been reported on Schedule D and/or Form 8949), you will generate a loss, but it will also be a QBI loss.  Your QBI loss will carryover to the next year.  

@olio1987

[Lucy196]

Hi George,

Thank you for kind reply. Your detailed explanation is most helpful. I have a question regarding to the QBI loss carry over, suppose you has a capital gain amount 30k on Schedule D in 2021, your expense on schedule C is 5k,  assume no other income, your AGI in 1040 is 25k, so you have positive income in 1040, you mean in this case, you can carry -5k QBI to next year? 

Back to my original question,  use the above example, form 1040 shows positive income 25k,  because

TTS trading is a “specified service trade or business” (SSTB) , and SSTB allow QBI deduction, so TTS trading even without 475f selection still qualify for QBI deduction, correct?  

Thanks a lot,

Lucy

[GeorgeM777]

Yes, the QBI loss of $5,000 would carryover to the subsequent year.  It would retain its character though as a QBI carryover loss.  In other words, it would offset positive QBI.  

Yes, TTS without the 475 election are still eligible for the QBI deduction; however, with no income on a Schedule C, there is no positive QBI to offset with a QBI carryover loss.  Remember, TTS with no 475 election report their gains/loss on Schedule D and Form 8949 and those gains/losses are capital gains/capital losses.  Without the 475 election, the TTS gains/losses are subject to the capital loss limitation of $3,000 and TTS are subject to the wash sale rule.

You are correct in that TTS is considered a specified trade or business and as such is subject to income thresholds.  Regarding QBI income thresholds the IRS has stated:

• If your 2021 taxable income before the QBI deduction isn’t more than $329,800 married filing jointly, $164,925 for married filing separately, and $164,900 for all other returns, your SSTB is treated as a qualified trade or business, and thus may generate income eligible for the QBI deduction. 

Here is a link to the IRS publication that discusses the QBI deduction.  The above quote was obtained from page 2 of the publication. 

Deduction for Qualified Business Income

@Lucy196

[olio1987]

Thanks for all the responses @GeorgeM777  ! You’re awesome!

one last question for you:

if I had technically a short term capital loss of -17K in 2021… but because of not having MTM I fell into the was sale rule and insyeqd my 2021 1099B shows short term capital gains of 12K…. I ended up having to pay taxes on this capital gain for 2021. 

This year in 2022 I made the 17K money back and more … so my wash sales were removed and I’m showing for this year a short term capital loss of course because it carried over into this year once I stopped trading the same ticker or I made money on the ticker. 

If I elect MTM 475 for 2022, do you foresee a problem ? Will I lose the ability to claim this negative balance if I do claim MTM for this year ? Since technically without the wash sale rule those loses happened in 2021 ? 

[GeorgeM777]

It depends.  If you decide before the filing deadline in 2022 to make Section 457 election for securities traders (and adopt a marked-to-market accounting) that election is good for all 2022, and all subsequent years until you formally revoke that election.  That means that your losses, if any, for 2022 will be ordinary losses.  Gains in 2022  will be ordinary gains.  All of this relates to your TTS. 

I'm not sure exactly what you mean by "lose the ability to claim this negative balance."  The wash sale rule essentially disallows a loss.  That loss just gets added to the cost basis of the security that you purchased which triggered the wash sale rule.  If you sold that security again in 2021, and realized a loss, (and no further wash sales for that security), then that loss will carryover to 2022.  Yes, you can use that loss to offset capital gain income, but only capital gain income and up to $3,000 of ordinary income.  In other words, that loss from 2021 retains its character as a capital loss because you had not made the Section 457 election for 2021.  Married, filing separately, then the amount you can deduct against ordinary income is $1,500. 

Follow-up with additional information if necessary.  

@olio1987

[Lucy196]

Hi George,

Thank you for information and kind reply.  After reading your reply, I got more questions. suppose a person (assume single status) has capital loss 21k in 2021. in 2021 tax return, he/she can deduct 3k loss, and carry 18k loss to 2022. Then he/she choose 475f before 4/18/2022,

my question is:

1:  when he/she file 2022 return, his/her capital loss carry over to 2022 is 18k which he/she can only deduct 3k loss (because it was capital loss in 2021 when he/she did not select 475f),

 can he/she still carry remaining 15k capital loss to 2023 and beyond even he made 475f selection for 2022?

2: after he/she made 475f selection before 4/18/2022, assume he/she did not has w2 income or and other income in 2022, 2023 and beyond, only possible income is from stock treading. Suppose he/she had bad year in 2022 and  he/she had capital loss (now consider as original loss) 25k in 2022,   can he/she carry 25k original loss to  2023 and beyond?  The reason I ask  question 2 is because I have  impression that you can only carry original loss limit to 80% of your taxable income of next year (in this case 2023). But since the person do not have any other taxable income but loss here, it seems he/she cannot carry original loss 25k to next year (zero * 80% = zero) , is it the case? Thanks a lot.

[GeorgeM777]

Question 1 - Yes, the losses realized pre Section 475 election will continue to carryover and remain as capital losses.  Those capital losses will continue to offset ordinary income up to $3,000.  

Questions 2 - Yes that $25,000 loss will carryforward; however, there are other things to consider.   My prior post should have included additional information regarding the carryover losses for traders who have made the Section 475 election.  

When traders have negative taxable income generated from business losses, which would be the case in your example, Section 475 accounting classifies these losses as net operating loss (NOL) carryovers.  Starting in 2018, The Tax Cuts and Jobs Act (TCJA) repealed the two-year NOL carryback, except for certain farming losses and casualty and disaster insurance companies. These TCJA changes mean NOLs are carried forward indefinitely (it was limited to 20 years before the TCJA changes), however, the deduction of NOLs is limited to 80% of the subsequent year’s taxable income.

To use your example, let's say in tax year 2023, the trader had a profitable year and had taxable income of $10,000.  That $25,000 NOL from 2022 will carryover to 2023, but the NOL can only offset 80% of the taxable income of $10,000, or $8,000.  The remaining NOL will continue to carryover to subsequent years and the deduction will continue to be limited to 80% of taxable income.  

@Lucy196

[Lucy196]

Hi George,

Thanks a lot, That's great answer. It seems that I confused 80% deduction vs 80% carryover of TI.

Thanks again,  

Lucy