with 475f MTM selection in 2021, can you carry back loss made in 2021 to previous year 2020 but no 475f selection in 2020

[Lucy196]

Here is the scenario:

A trader (qualify for trader status) had capital gain in 2020 but did not make 475f selection in 2020,  he/she made 475f selection by 4/15/2021, but suffered a capital loss in 2021, can he/she carry the loss made in 2021 back to 2020?  If so how he/she use TurboTax to amend 2020 tax return to show loss in 2021 carried back?

In addition, can he/she carry remaining loss forward to 2022? It seems that you can only carry 80% NOL of your Taxable income. in this scenario, theTaxable Income is negative, does it means you cannot carry forward your loss?

Thanks a lot for kind help.

Lucy

[ColeenD3]

No. Every tax year is separate. While capital losses are limited and you are required to carry them forward, this is an isolated example.

[Lucy196]

Hi ColeenD3,

Thanks for kind reply. However, I am referring ordinary gain/loss here, not capital gain/loss.

Because I made 475f MTM selection in 2021, the capital gain/loss in 2021 become ordinary gain/loss.

my question is that can I carry this ordinary loss made in 2021 (no longer considered as capital loss for tax purpose due to 475f selection) back to 2020 (in 2020, did not make 475f selection )?

Thanks in advance for help,

Lucy

[ColeenD3]

The answer is still the same. No, every tax year is separate. Even if you had an NOL, that is no longer available to be carried back.

[Lucy196]

Hi ColeenD3,

Thank you  for reply. I read below in the community :

First, yes, you can deduct expenses on Schedule C even if you do not show a positive income. It will be reported on your 1040 as a NOL which can offset other sources of income or act as a carry forward NOL if you have no income.  You can also carry back a NOL 5 years with the Tax cuts and Jobs act of 2017.

Does IRS changed theNOL carry back rule?  If so, could you share the link here? Thanks a lot,

Lucy

[GeorgeM777]

To follow-up on the comments from @ColeenD3, the Tax Cut and Jobs Act eliminated, for most taxpayers, the option to carryback NOLs to prior years.  

Regarding NOLs, the IRS has stated, in pertinent part, the following:

• Most taxpayers no longer have the option to carryback a net operating loss (NOL). For most taxpayers, NOLs arising in tax years ending after 2020 can only be carried forward. The 2-year carryback rule in effect before 2018, generally, does not apply to NOLs arising in tax years ending after December 31, 2017. The CARES Act provided for a special 5-year carryback for taxable years beginning in 2018, 2019 and 2020.

Here is a link to the IRS webpage from which the above information was obtained:  Net operating losses

@Lucy196

[Lucy196]

Hi George,

Thanks a lot for kind reply. the link you gave shows:

Most taxpayers no longer have the option to carryback a net operating loss (NOL). For most taxpayers, NOLs arising in tax years ending after 2020 can only be carried forward. The 2-year carryback rule in effect before 2018, generally, does not apply to NOLs arising in tax years ending after December 31, 2017. The CARES Act provided for a special 5-year carryback for taxable years beginning in 2018, 2019 and 2020. Exceptions apply to certain farming losses and NOLs of insurance companies other than a life insurance company. Also, for losses arising in taxable years beginning after Dec. 31, 2020, the net operating loss deduction is limited to 80% of the excess (if any) of taxable  income (determined without regard to the deduction, QBID, and Section 250 deduction over the total NOLD from NOLs arising in taxable years beginning before January 1, 2018.

Suppose you had bad year in2021, your capital gain is a loss, you have no other income, so Taxable income is a negative number, can you carry all of your loss to next year? or you can only carry 80% of your taxable income? Thanks a lot,

Lucy

[GeorgeM777]

Yes, your entire loss will carryover to future years.  Because you are in the business of trading securities, your losses from your business will be qualified business losses (QBI) and will carryover to future years.  Any gains in 2022 can be offset with your QBI losses from the prior year.  

As a trader who has made a timely mark-to-market election (Section 475), your gains and losses from sales of securities are treated as ordinary gains and losses (except for securities held for investment).  These gains and losses must be reported on Part II of Form 4797, Sales of Business Property. 

Given that you have made the election under Section 475, TurboTax recommends that you use the CD/downloadable version of TurboTax because some entries may need to be entered directly in Forms Mode when completing Form 4797.   Here are the steps to follow if you use (highly recommended) TurboTax CD/download.  

How to enter sale of business property for traders with MTM election:

1. Using your CD or downloaded version of TurboTax, open or continue to your return.

2. Under the Business Items section select Start or Update beside Sale of Business Property.

3. Select Sales of business or rental property that you haven’t already reported.

4. Select Yes or No to question Do all of the following apply to the property you sold?

5. Enter the details of the sale.

6. On the page Tell Us About Your Sale, select the Type of sale (To report on Form 4797 in Section II, select Held one year or less).

7. Enter the amount reported on Form 1099-B on the next input screen.

@Lucy196