Claiming Traders Status

CarlErikson · Jan 19, 2003

Quote from cheeks:

Let me rephrase my question. If you did elect MTM on your stock account and investment on your futures, do you think you could defend it during an audit? My concern is that they would see two actively traded accounts and the red flag would go up.

From what I understand, if you trade both securities and commodities, then you have two occupations. One is "securities trading" and one is "commodities trading." When you elect MTM, you must specify that you are electing it for your "securities trading" business (and not for "commodities trading"). If you do this, your commodities trading will naturally be marked-to-market and you will receive 60/40 tax treatment. However, if you don't do so well in a year trading commodities, I believe your capital losses (for commodities) will be capped to $3,000 (since you didn't elect MTM for your commodities trading). The MTM election is made separately for securities and commodities trading.

I am assuming that E-mini S&P and E-mini Nasdaq 100 futures contracts are considered commodities and not securities since they are treated as 1256 contracts. Please correct me if I am wrong.

CarlErikson · Jan 19, 2003

Quote from SethArb:

what really gets me upset is hearing that some people

actively trade in their IRA acct and hope to never pay taxes !?

Why is this upsetting? If you have a Roth IRA then the money is pre-taxed before entering the account. You can trade this Roth IRA account as much as you want and you will not have to pay any taxes on gains when you withdraw the money.

In regular IRAs, the tax is deferred til withdrawal. So you can compound tax free up to the point you withdraw the money.

profitseer · Jan 19, 2003

Quote from CarlErikson:

From what I understand, if you trade both securities and commodities, then you have two occupations. One is "securities trading" and one is "commodities trading." When you elect MTM, you must specify that you are electing it for your "securities trading" business (and not for "commodities trading"). If you do this, your commodities trading will naturally be marked-to-market and you will receive 60/40 tax treatment. However, if you don't do so well in a year trading commodities, I believe your capital losses (for commodities) will be capped to $3,000 (since you didn't elect MTM for your commodities trading). The MTM election is made separately for securities and commodities trading.

I am assuming that E-mini S&P and E-mini Nasdaq 100 futures contracts are considered commodities and not securities since they are treated as 1256 contracts. Please correct me if I am wrong.

right Carl, but think about it. You have to elect mtm by 4/15 of the current year. You really have to wonder about a futures trader who on 4/15 thinks he will have more than 3k in losses by Dec 31!

crackedback · Jan 19, 2003

Carl,

You're correct in your statement.

If you are profitable as a futures trader it is bad from a tax standpoint to claim MTM due to the loss of the 60/40 gap gains treatment. If you've sustained significant losses, then it may be smart to do so, as it can offset ordinary income from another job.

Caveat, once you claim MTM it's tough to rescind.

Later,

Cracked

cheeks · Jan 19, 2003

Thanks for explaining.

Interesting....

trader42 · Jan 23, 2003

Quote from CarlErikson:

You can trade this Roth IRA account as much as you want and you will not have to pay any taxes on gains when you withdraw the money.

Are withdrawals from Roth IRA also exempt from state taxes?

CarlErikson · Jan 23, 2003

Quote from trader42:

Are withdrawals from Roth IRA also exempt from state taxes?

Good question. Got this from a Yahoo page:

One more thing. States don't always follow changes in federal law, so there may be state taxes on accumulated earnings that are withdrawn from a Roth IRA, whether or not they are free from federal taxes. You'll need to check with the department of taxation in your state to see how they handle these distributions.

Man, that is irritating. Got to move to a state that doesn't tax Roth IRAs on withdrawals.

illiquid · Jan 25, 2003

Quote from profitseer:

right Carl, but think about it. You have to elect mtm by 4/15 of the current year. You really have to wonder about a futures trader who on 4/15 thinks he will have more than 3k in losses by Dec 31!

However, I believe once you've elected MTM, your losses turn into business losses and you'd not be able to cancel out this year's losses with past profits (which are under captial gains). The only way MTM really helps you is if you are primarily an equities trader (so the 60/40 advantage doesn't apply anyways) and have so far only profitable years. If so, having your future gains categorized as business income will provide a good hedge in case you have a bad year (you'd get a nice chunk of change refunded to you).

I never heard of MTM until it was too late; I had a huge tax bill for 2000, and managed to lose a big chunk of equity for 2001. Unfortunately I was told it was basically impossible to receive a refund of taxes paid in 00, even though trading is my only source of income and is considered a "business". My 2002 was basically break even, so all I can look forward to is some tax-free gains for this coming year.

white17 · Jan 26, 2003

There are too many ins and outs for me to keep up with so I leave it to Green & Co. I had a great yr. in 97-98 and a bad one in 99. Claimed MTM and recouped almost all previously paid taxes. It's been easy ever since. The wash sale rule is nice to be rid of. As I recall reading the info from Green several years ago, it is not difficult to "un-elect" mtm if you want to. I don't sweat the audit either. I haven't been audited yet but feel confident that Green can and will defend my return.