Withdrew entire 401k but suffered 50k in trading options how to offset amount with 401k

How can I claim the 50k in trading option losses against this? I am aware that normally 3k is only allowed yearly against ordinary income.

 

Unless you are a trader who has the mark-to-market election in effect under IRC 475(f), you can't. 

I have until April 2025 to elect 475(f) if I am unable to recuperate my losses correct or was it supposed to be done while filing 2023 Taxes?

 

I am not sure from what I am reading from the IRS site 

 

"As a trader, you 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 you intend the election to become 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:

1. That you're making an election under section 475(f);
2. The first tax year for which the election is effective (that is, the tax year for which a timely election is being made); and
3. The trade or business for which you're making the election.""

 

Also it says I am required to file Form 3115 if I go through with this correct?

unless you are a trader and made the 475(f) election either with a timely filed 2023 return or extension, you cannot use it for 2024. the requirement is that the election be timely file with the return or extension for the tax year preceding the tax year the election is to take effect

 

the election and 3115 must be included with

timely filed 2022 return or extension - earliest effective date would be for the 2023 tax year

timely filed 2023 return or extension - earliest effective date would be for 2024 tax year and so on.

timely filing with your 2024 return/extension due 4/15/2025 would mean the election would not take affect until your 2025 tax year. 

you must be a trader. investors can't make the election. 

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.
The following facts and circumstances should be considered in determining if your activity is a securities trading business:

Typical holding periods for securities bought and sold;
The frequency and dollar amount of your trades during the year;
The extent to which you pursue the activity to produce income for a livelihood; and
The amount of time you devote to the activity.

when did you withdraw the $100,000?  In 2023 or 2024?  When did you incur these trading losses?

 

I'm sure you realize that the $100,000 is subject to regular income tax plus a 10% penalty, regardless of what you used the money for.  You should also be aware that the income tax system is pay-as-you-go an expects you to make estimated tax payments in 4 quarterly installments, and you will be subject to an underpayment penalty unless you can pay the entire tax you owe by the filing deadline (April 15, 2025, assuming you made the withdrawal in 2024).

 

Even if you figure out some way to deduct the entire $50,000 trading loss, you will still owe the 10% penalty on the entire $100,000 withdrawal plus your normal income tax on whatever you can't deduct.