Trader vs Investor Filing, and changes year over year

Transactions as an investor (for example, selling a long-term holding) cannot be considered to be income associated with your business as a trader.

 

Trader status must meet the following qualifications every year.

 

The law considers this to be a business. To be engaged in business as a trader in securities, you must meet all of the following conditions:

• You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
• Your activity must be substantial; and
• You must carry on the activity with continuity and regularity.

Your Mark-to-Market election must be timely.

 

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.

 

For more information, please see this LINK

i understand, but that only half answers my questions.

 

will it pose an issue if i take the trader election this year, but potentially don't next year.

and will any long positions held at end of year 2021 not be able to qualify for long term gains/losses treatment in the future, if i take the mark to market election in 2021?

it's too late to make the M-T-M election for 2021. it must have been made by the original due date of the 2020 return. if you think you'll qualify and want the election for 2022, you must file the election by the due date of the 2021 return.

 

if you make the M-T-M election 

 

the IRS looks to the number and type of trades to determine, upon audit, if trader status is justified.

a trader is one who looks to profit from short-term swings in market price. 

generally recommend is that you have 1,000 short-term trades or more for in a year though one court case allowed for about 700 but maybe because that taxpayer had a second occupation 

 

note that a trader does not need to make the M-T-M election.

 if it's made all income from trading is ordinary income (see exception below)for getting investment treatment)  but the wash sale rule doesn't apply to the trading activity. the other side to the election is that at year-end any unrealized gain/or loss (market vs tax basis) is reported for that year. 

 

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 holding them in a separate brokerage account).

 

 

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

 

will it pose an issue if i take the trader election this year, but potentially don't next year.

and will any long positions held at end of year 2021 not be able to qualify for long term gains/losses treatment in the future, if i take the mark to market election in 2021?

 

if you make the M-T-M election in 2021 for 2022 it will affect all long-term positions held at the end of 2021.  

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 holding them in a separate brokerage account).

oh wow ok, you have to make the election *before* the upcoming year?

 

but i mean in my case, yes i think i had like 500 trades or something, but it wasn't something I *anticipated* doing, so i wouldn't have known beforehand....does that matter?   I could not have known in 2020 (pandemic related).

 

and you're saying if i want to change the status for 2022, i have to revoke the trader status at the filing of the 2021 return?

 

if so, it's interesting that you have to do all of this ahead of time.  i mean who could possibly know the future 100%

the law is firm, no exceptions. the 475(f) election must be made by the original due date of prior-year return.

 

 

personally, I don't think 500 trades is enough to qualify as a trader 

generally recommended is 1000 trades

one court case there were 700 trades. your still short and if you wrongly claim trader status your schedule C expenses are no longer deductible.

 

you are mixing up two things  - one being a trader. if you are not a trader you are an investor see above. a trader gets schedule C deductions for trading expenses an investor gets no deduction for those types of expenses. they've been eliminated for 2018-2025. a trader does not have to make the 475(f) election. then trades are capital gain or loss and the wash sale rules apply.  

 

second, only a trader can make the 475(f) election. all trades not properly designated for investment are ordinary  (not even short-term capital). reported on form 4797 and any unrealized gain or loss at the end of the year is recognized.  the wash sale rule does not apply to trades subject to the M-T-M election but trades you designate for investment are.