Becoming legit IRS registered trader. Questions if you can help.

[JackMorgan]

In case it's not clear, I have no problem with TTS and filing that way. Been doing it for years

My issue is , I think I'm better off now ditching it , as I have a loss in 2020 that I couldn't write off against any income .

Even if I could figure out a NOL carry forward , I thinks its too late to do that as you needed to file something in a timely manner . So I've given up on that

The idea is to 'suspend' the TTS and with it the MTM style filing , and carryover all loss beyond the $3000 max writeoff into future years .

The reference to 'suspending' TTS based on lack of activity, suggests that can be done, but its one of those things that are just impossible to find particulars on. Stopping MTM without revoking it formally, is something Im not sure about.

 

[qlai]

The IRS does not respond. You don't get a letter saying you are "approved" as a trader. Doesn't work that way.

So in one of the documents you attached, it says below. So after form 3115 is filed, it sounds like it can be either approved or rejected. Am I misunderstanding this? Thanks, your input is very helpful.

"
.03 Use of mark-to-market accounting
under § 475(e) or (f) is a method of ac-
counting.
Generally, a taxpayer must ob-
tain the consent of the Commissioner to
change a method of accounting for federal
income tax purposes. To obtain this con-
sent, a Form 3115, Application for
Change in Accounting Method, generally
must be filed during the taxable year in
which the taxpayer desires to make the
change in method of accounting. The
Commissioner, however, is authorized to
prescribe administrative procedures set-
ting forth the limitations, terms, and con-
ditions the Commissioner deems neces-
sary to obtain consent. See § 446(e) and
the regulations thereunder."

 

[BMK]

So in one of the documents you attached, it says below. So after form 3115 is filed, it sounds like it can be either approved or rejected. Am I misunderstanding this? Thanks, your input is very helpful.

Form 3115 is used to request a change in accounting method. And this form does indeed need to be filed in many cases when making the mark-to-market election. However, the approval is automatic for this type of accounting change. Yes, the IRS does have the power to request additional information, and in some cases they can deny the change. But that does not happen often. In most cases, you will not get a response, and the approval is deemed to be automatic for this type of change in accounting method.

There are many, many different reasons that taxpayers file Form 3115. Some are treated as automatically approved, and some are not. In some cases, there is even a very expensive fee that must be paid when filing the form. It depends on why the change is requested, and what type of change. The change in accounting method associated with the MTM election is one of the types where the approval is treated as automatic, and there is no fee.

This information is buried in the instructions for Form 3115, and in another document called Revenue Procedure 2018-31. I have attached these files. This stuff is not light reading.

On the first page of the instructions for Form 3115, you can find a very superficial discussion of "automatic change procedures." It says:

Form 3115 filed under these procedures may be reviewed by the IRS. If it is, you will be notified if information in addition to that requested on Form 3115 is required or if your request is denied. No user fee is required. An applicant that timely files and complies with the automatic change procedures is granted consent to change its accounting method, subject to review by the IRS National Office and operating division director.

In plain English: You will only be notified if the IRS wants additional information or if your request is denied. You will not be notified if your request is granted under the standard procedures for automatic changes.

A complete list of the changes that qualify as automatic can be found in Rev. Proc. 2018-31. The discussion of the MTM election is in Section 24, which begins on page 294 of the PDF.

The instructions for Form 3115 run for 29 pages, and contain numerous references to the MTM election under Section 475. Some of the discussion only applies to financial institutions, but much of it applies to traders as well. You can find them by performing a CTRL-F search for the phase mark-to-market within the PDF. For the search to work, you need to use the hyphen, and not use spaces.

BMK

 

[qlai]

Man, you seem to know more than most of “regular” accountants out there! Thanks!

 

[BMK]

I did not mean to imply that anyone can be a trader for tax purposes just by filling out a few forms, and that the IRS will never challenge it. They can and they do challenge it. But they don't usually challenge or deny the Form 3115, or the initial MTM election.

The IRS can audit any tax return that you file (Form 1040 for individuals, Form 1065 for partnerships, etc.) and challenge your trader status. They can do this whenever they want, and it can be years after you made the initial election. They can audit any tax return for up to three years from the date it is filed.

You often hear that it is "hard" or "difficult" to "get" trader tax status. It's not hard to fill out the forms and make the election. But it can very be hard to defend it in an audit, because the qualifications are very complicated, and, as has been previously noted, there is no black-and-white test. It's based on all the facts and circumstances.

You might have what you think of as a good year in which you had net profits from trading of around $40,000. And if you are single with no dependents, that is arguably a decent income that you can live on in some parts of the USA. So on those bare facts, it might look like you are making a living from trading.

But if you also had $10,000 net income from rental property, and you also had another $12,000 in self-employment income from driving an Uber, you might find it very difficult to persuade an IRS auditor that you qualify for TTS.

If you can wade through the forms, you can make the election on your own. I recommend using an accountant, but it's not brain surgery.

If you get audited, you definitely need an accountant or a tax lawyer who is familiar with the issues surrounding trader tax status. If you go into that audit on your own, you will get eaten alive.

BMK

 

[qlai]

But it can very be hard to defend it in an audit, because the qualifications are very complicated, and, as has been previously noted, there is no black-and-white test. It's based on all the facts and circumstances.

That’s why I think it is “safer” to just create an entity. It’s a clear separation between personal taxes and business taxes, which is what I assume IRS wants. In other words they don’t want casual/hobby traders “abusing” the system.

 

[newwurldmn]

In case it's not clear, I have no problem with TTS and filing that way. Been doing it for years

My issue is , I think I'm better off now ditching it , as I have a loss in 2020 that I couldn't write off against any income .

Even if I could figure out a NOL carry forward , I thinks its too late to do that as you needed to file something in a timely manner . So I've given up on that

The idea is to 'suspend' the TTS and with it the MTM style filing , and carryover all loss beyond the $3000 max writeoff into future years .

The reference to 'suspending' TTS based on lack of activity, suggests that can be done, but its one of those things that are just impossible to find particulars on. Stopping MTM without revoking it formally, is something Im not sure about.

you can carry the Nol’s forward. Just not backwards like you used to be able to.

 

[Chavulla]

I have been filing "Trader Status" on my US Tax Returns for probably about 15 years now. I researched it then and there was no IRS "Official Process" to get declared as such nor were there any clear description of who would qualify. Also the IRS cases in their audits were contradictory. So I just declared myself as "Trader Status" ever year.

Here is how it works: I just file a Schedule C with occupation as a Trader and report Zero income. (Trading Gain or Loss is reported on Schedule D) but I claim my trader expenses for a net loss equal to sum of all my expenses. I detail the expenses in the "other expense category". I include computer expense, quote feeds, educational materials, tax return fees, IBD subscription, Internet feeds, etc. I claim anything that I can justify as related to my trading. It is up to the IRS to audit me and prove that I do not qualify. So far they have accepted it every year.

This is the first year I am filing under my new TTS election. I'm contemplating filing myself after receiving a $4000 quote from Green Trader. I've read through almost every IRS procedure on the topic and have a clear understanding of what needs to be done. I'd love to ask you a couple questions, particularly about the deduction aspect. It sounds like you itemize your deductions, I was under the assumption that as qualified under TTS, one qualifies under the standard "QBI/ qualified business income" Did you not take that deduction?

 

[Illini Trader]

This is the first year I am filing under my new TTS election. I'm contemplating filing myself after receiving a $4000 quote from Green Trader. I've read through almost every IRS procedure on the topic and have a clear understanding of what needs to be done. I'd love to ask you a couple questions, particularly about the deduction aspect. It sounds like you itemize your deductions, I was under the assumption that as qualified under TTS, one qualifies under the standard "QBI/ qualified business income" Did you not take that deduction?

Definitely do not pay them $4000 as that is a rip off. I believe it was the same firm but I think I paid them $35 for some information but that was a couple of decades ago. I do not itemize deductions any more. All I do is report all my investment expenses on a Schedule C with zero income. Investment Gains and losses are reported on the regular forms. I do not know anything about QBI and have done nothing with that.

 

[Business2122]

I have been trading for two years and have moved into it full time due to increased success. I've thrown myself completely into it now I've quite my job and I trade many times a day every trading day. This is how I'm going to make my living no doubts, ifs, ands or buts about it. I need straight answers on who has legit IRS trader status and what it entailed to get it.
Thanks
M

Generally to qualify as a 429 trader you’ll need to ;

• Profit from “generally” only daily trading and deviations of it that mimic market movements
• Have substantial gains in profits “generally”, for the sake of argument no less than 10,000 usd equivalent monthly
• Carry on day trading activities at least 4 days a week