2006 Taxes: MTM?

[dougcs]

Hard to believe, but it seems like it is time to start getting ready for income tax reporting.

I am considering switching to MTM and have a question.

I have several brokerage accounts. Two are used for short term trading, ie, I believe the activity in them qualifies for Trader Status. The other accounts are long term and have multi year trades that have significant appreciation.

My question is if I go to MTM will the long term gains in those accounts be subject to MTM which would if true, trigger a large unwanted tax burden for me. What I want to do is use MTM for the short term accounts and leave the long term ones alone.

TIA,
DS

 

[traderstatus]

Quote from dougcs:What I want to do is use MTM for the short term accounts and leave the long term ones alone.

You want your cake and eat it too?

Well this is allowed with a little care in handling your books and records and in making the M2M election - which assuming you are an individual filing form 1040, you can not do for 2006 because the deadline has passed...

BUT a caution: While the IRS does allow a trader to specifically segregate out long-term investments from their trading business, and therefore not be M2M (preferably in a separate brokerage account, preferably labeled "long-term investing" on the address portion and very highly recommended not trading the same securities as you trade in the trader business accounts)...

... while this in theory can be done, is it a trap for the unwary? The IRS sometimes gives with one hand and then slaps you around with the other. The whole ability to claim trader status can be successfully challenged if the taxpayer has significant investments, if he has relatively high portfolio income such as interest, dividends and long-term capital gains.

So depending on how the ratio of these long-term investments vs. the trading account looks you may do just fine - or you may put your trader status & M2M in jeopardy.

Forming an entity to trade thru helps elevate the issues I've mentioned above.