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Mark to market election under section 475(f) questions

Forum|Forum|3 years ago
February 26, 2023
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In tax year 2022, I had more than enough daily trading activity to qualify for TTS since end of June 2022. In 2022, I also formed a single member LLC taxed as an S-corp but did not have any activity on the business, did not start the business brokerage account, did not do anything with the business so the taxes will be pretty bare for the business.

In January 2023, I started the business brokerage account for the S-corp and have been trading on that ever since and will continue to exclusively trade on that account.

I would like to make the MTM election for 2023 year on the 2022 taxes. Would I include the MTM statement, that states 1) that you're making an election, 2) the first tax year which it's effective, and 3) the trade or business for which you're making the election, to the personal income tax return or to the tax return for the S-corp? Also, for the trade or business would I just specify that it is for the S-corp and give the name? And also, the form 3115 with the tax return, would this be attached to the personal income tax return or the tax return for the S-corp?

For this whole process, the deliverables that I will need to send are 1) income tax return, 2) S-corp tax return, 3) MTM statement, 4) form 3115 with tax return, and 5) form 3115 to the IRS national office at 1111 Constitution Ave., NW Washington, DC 20224. Are there any other deliverables that I need to send to get this election done?

And lastly, it is my understanding that I need to file these tax returns/deliverables through the mail. Is this true and are you aware of a deadline for sending it through the mail?

Thank you so much

Not A Product Question

Best answer by DavidD66

Hi @AmyC @GeorgeM777 @Critter-3

I am a stock trader (TTS) - sole proprietorship. It is not an S-corp so no earned income. Would I need earned incomes (get another W2 job or another self-employment income stream) to write off trading expense (e.g. home office expense) or I can write my trading expense off the Sec. 475 Mark-to-Market election ordinary income (non earned income)?

Also, if my brokerage firm doesn't offer mark-to-market accounting, can I simply use the beginning account value of Jan and ending account value of Dec, which are easily available in any broker's monthly statements, to get the 475 income that year? I only trade stocks, or selling naked puts or covered calls. Thankss!

A qualified trader (someone with Trader Tax Status) is allowed to deduct business expenses on Schedule C (Form 1040) Profit or Loss From Business (Sole Proprietorship). This includes taking Section 179 deductions and expensing (or capitalizing and depreciating) equipment used in trading activities. 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. Gains and losses from selling securities from being a trader aren't subject to self-employment tax.

The IRS defines a qualified trader as one who trades often and continuously to profit from the short-term fluctuations in market prices. To become a qualified trader, you must trade on a full-time basis. Trading must be the majority of your income. Traders make multiple trades per day and research, document, and educate themselves on the art of trading.

See IRS Topic no. 429, Traders in securities (Information for Form 1040 or 1040-SR filers) for more information.

If you are not a qualified tax trader, the IRS does not consider trading to be a business, all income earned is considered unearned or passive income. Your income isn't subject to self-employment taxes. You can't deduct normal business expenses, even though the costs incurred to become a successful trader can be significant.

There are no rules regarding how your broker/dealer tracks and reports gains and losses. If your brokerage firm doesn't offer mark-to-market you can still use it, however, the tracking could get cumbersome. There are software programs available that will compute gains and losses, and track cost basis using mark-to-market. If you trade enough to qualify for Trader Tax Status, and your broker doesn't offer mark-to-market accounting, I recommend using one, if you have made a mark-to-market election under Section 475.

AmyC

Employee

1. If all of your trading will be inside the S corp, you would need the personal election. The S corp is generally not recommended for traders. It requires you pay yourself wages on a w2, you must pay 15.3% in Social Security and Medicare tax on income. Please review business structures.

2. You have the complete list.

3. Yes, you need to mail your effected return(s) with the election attached.

Topic No. 429 Traders in Securities Form 1040: 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 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), Capital Gains and Losses 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.

[Edited 3/1/2023 9:07 am]

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E

E9591CA009Author

Hello,

Thank you for taking time for a response. @AmyC

How will the IRS be aware of the trading activity on my income tax return that qualifies me for TTS/MTM election if I am making the election with the 1120-S for the business, since the business did not have any trading activity last year?

Can I mail my personal income tax return with the 1120-S/MTM statement/3115? Or do I need to file them separately?

Thank you

G

GeorgeM777

The IRS will be aware of your trading activity by reviewing, if they choose to do so, your trading activities as listed on the statement you will need to attach to Form 4797, Sale of Business Property. When you elect Mark to Market accounting, you will be completing Form 4797 and attaching a statement to such form that lists all your transactions in a manner consistent with the columns of information on Form 4797. While TurboTax supports Form 4797 (and you will need TurboTax CD/download, not TurboTax online), presently there is no way to upload and attach your transaction list to Form 4797. Thus, you will need to paper mail your return to the IRS.

To follow-up on the post from @AmyC, filing as an S-Corp is a tax election. An S Corp is not a legal entity in the same way as your LLC. Thus, you should file the Mark-to-Market election statement in your name as the owner of your LLC. The MtM election statement you will file by the tax due date (April 2023, and there are no extensions allowed for the MtM election) is prospective in that the IRS will know that for tax year 2023 you have elected the MtM accounting method.

Yes, you can mail your tax return to the IRS. In fact, as there is no way to attach the MtM election statement to your return, you will need to paper mail your return to the IRS. Include Form 3115 with your return.

@E9591CA009

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Tran2

@GeorgeM777 @AmyC

Hello George and Amy,

1.I was wondering as an individual day trader can I use mark to market election on my 1040 return.

2. Also do I need to ask my trading brokerage to use mark to market accounting method in order to use the election?

3. I just recently ask to switch to mark to market election accounting method in September 2023, would that mean that in 2024 return when I use 475f I would just only be able to get the loss from September 2023 to December 2023 or how can I get that effect for the whole year 2023 because I was not aware of the 475f election.

Thank you so much and I am looking forward to hearing from you soon.

Critter-3

1.I was wondering as an individual day trader can I use mark to market election on my 1040 return. Yes you can if you made the election timely.

2. Also do I need to ask my trading brokerage to use mark to market accounting method in order to use the election? They will not do so ... they cannot do so. This is accounting you need to do for yourself.

3. I just recently ask to switch to mark to market election accounting method in September 2023, would that mean that in 2024 return when I use 475f I would just only be able to get the loss from September 2023 to December 2023 or how can I get that effect for the whole year 2023 because I was not aware of the 475f election. Sorry Charlie ... you cannot use the MTM election for 2023 at all since you did not make the election timely. The election for 2023 had to be made by 4/15/23. If you want to make that election for 2024 you need to file the election by 4/15/24.

D

dc20222023

Hi @AmyC @GeorgeM777 @Critter-3

I am a stock trader (TTS) - sole proprietorship. It is not an S-corp so no earned income. Would I need earned incomes (get another W2 job or another self-employment income stream) to write off trading expense (e.g. home office expense) or I can write my trading expense off the Sec. 475 Mark-to-Market election ordinary income (non earned income)?

Also, if my brokerage firm doesn't offer mark-to-market accounting, can I simply use the beginning account value of Jan and ending account value of Dec, which are easily available in any broker's monthly statements, to get the 475 income that year? I only trade stocks, or selling naked puts or covered calls. Thankss!