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bashirkh19
Level 1

trader tax status

Can turbo tax include trader tax status as a one of the choices when we start doing taxes on turbo tax. 

can turbo tax provide relevant irs forms to taxpayers  for section 475 trader tax status during the 2021 yr so the tax payer is ready with information to file 2021 taxes prior to April 15 deadline for 2021 taxes in  2022

 

2 Replies
dclick
Employee Tax Expert

trader tax status

Wonderful question!

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.

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.

Of course, the TTD 2021 version is not yet available, but the forms for the current year if you'd like to review what any of them look like are public from the IRS for the current year (so I took care to note form numbers above).

The Journal of Accountancy has a nice breakdown on the topic as well:
https://www.journalofaccountancy.com/issues/2014/jul/sec-475-election-20149537.html

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Mike9241
Level 15

trader tax status

the 2020 desktop version did not include the forms necessary to make the 475(f) election.

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 it is 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.
Refer to the Instructions for Schedule D (Form 1040 or 1040-SR), Capital Gains and Losses PDF for more information on how to make the mark-to-market election. It's important to note that in general, late section 475(f) elections aren't allowed.
After making the election to change to the mark-to-market method of accounting, you must change your method of accounting for securities under Revenue Procedure 2019-43 PDF, Section 24.01. In addition to making the election, you'll also be required to file a Form 3115, Application for Change in Accounting Method PDF. Publication 550 PDF describes the procedures for making an election under the section called "Special Rules for Traders in Securities." Non-filing of the Form 3115 mentioned above won't invalidate a timely and valid election.

 

 

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