Have a tax question...please help...

Traderstatus, or to anyone who may know:

Is it true that a trader does not need to make any type of MTM election in order to receive the more favorable 60/40 long term/short term capital gains treatment for Futures? I was under the impression that the favorable tax treatment for commodities was by default, and that no other type of election was required. TIA.
 
Quote from The_End:Traderstatus, or to anyone who may know:
Is it true that a trader does not need to make any type of MTM election in order to receive the more favorable 60/40 long term/short term capital gains treatment for Futures? I was under the impression that the favorable tax treatment for commodities was by default, and that no other type of election was required. TIA.
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The_End, You are basically correct. The Sec 1256 M2M is the default. The Sec 1256 M2M treatment basically just treats all open positions at year-end as being sold for tax purposes.

The confusion often arises because of the optional Sec 475 M2M election. The Sec 475 M2M election really has little or nothing to do with M2M at all, rather it basically just changes the 60%/40% Capital Gains into 100% Ordinary Gains.
 
For example, if you knew or estimated by April 15 of this year that you would end up with a net loss on your commodity trading (including forex, broad-based indices, options on futures, etc.), it would be advantageous to make the IRC 475 MTM election for commodities. You would give up 60/40 tax treatment, but it doesn't matter if you end up with a net loss. As traderstatus points out, the advantage would be that the loss would be considered an "ordinary loss", which means you apply that loss to any taxes paid in a previous year. If you stick with the default treatment for commodities you get the 60/40 treatment on gains, but a net loss for the year can only be applied to Section 1256 gains in the previous three years.

The instructions for Part I, Line 1 state you have to list all of your gains and losses from Section 1256 contracts. This means your short-term/long-term gains and short-term/long-term losses; it doesn't mean listing your transactions (unless there are any transactions not reflected in the gains/losses on your brokerage statement). The only reference to listing transactions is for Part III, where it says you should list any open positions with unrealized gains on the last day of the year (although this seems unnecessary since all positions are settled in cash at the end of each trading day).
 
Quote from JangoFolly:

For example, if you knew or estimated by April 15 of this year that you would end up with a net loss on your commodity trading (including forex, broad-based indices, options on futures, etc.), it would be advantageous to make the IRC 475 MTM election for commodities. You would give up 60/40 tax treatment, but it doesn't matter if you end up with a net loss. ..

The instructions for Part I, Line 1 state you have to list all of your gains and losses from Section 1256 contracts. This means your short-term/long-term gains and short-term/long-term losses; it doesn't mean listing your transactions (unless there are any transactions not reflected in the gains/losses on your brokerage statement).
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Jango,

1. I believe you have to elect M2M IRC475 in ADVANCE. By APR15 2006 for tax year 2006. Who knows in advance if they will have profit or loss so early in the year?

2. I'm quoting for the instructions for line 1:

"...List separately each transaction for which you did not receive a Form 1099-B or equivalent statement..."

So still seems I have to report every transaction that IRS has no record off from the broker.
Still looking/hoping for someone here to prove me wrong...
 
Quote from OptionsWizard:2. I'm quoting for the instructions for line 1:

"...List separately each transaction for which you did not receive a Form 1099-B or equivalent statement..."

So still seems I have to report every transaction that IRS has no record off from the broker.
Still looking/hoping for someone here to prove me wrong...
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You could be correct, you must list each separate transaction (with reasonable, allowable aggregations) BUT possibly only if you have the fairly rare situation where the broker has NOT sent a form 1099-B to the IRS showing the net gains from closed transactions and the net year-end M2M paper gains on open transactions. ...or a differing fiscal year-end, or other unusual situation.

I'd venture to say that most retail account based traders would receive a form 1099-B from their brokers showing the net gain/loss for the year. In this case, which is the normal situation, you merely write "Form 1099B - XYZ Brokerage" on form 6781 part 1, line 1(a) and the net amount(s) over to the right in (b) or (c)

If the normal situation is not your case, you can keep looking and yes eventually you will find someone who will tell you what you'd like to hear. It's that kind of "professional advice" that eventually forced the IRS's hand to clamp down on taxpayers a few months ago because of people all over the internet "advising" that securities transactions should not be listed in detail either. Possibly to drum up more business on the IRS audit side after tax prep work was done for the year, or simply to tell people what they wanted to hear... or out of sheer ignorance, take your pick :p
 
Quote from OptionsWizard:

Jango,

1. I believe you have to elect M2M IRC475 in ADVANCE. By APR15 2006 for tax year 2006. Who knows in advance if they will have profit or loss so early in the year?

2. I'm quoting for the instructions for line 1:

"...List separately each transaction for which you did not receive a Form 1099-B or equivalent statement..."

So still seems I have to report every transaction that IRS has no record off from the broker.
Still looking/hoping for someone here to prove me wrong...
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You're correct on number 1; I can't envision a realistic case where one would want to do that, unless you took a whopper loss in January that you know you could never turn into a net gain (but then you've got bigger problems than taxes at that point). I was just providing the only rationale as to why someone would want to elect IRC 475 for commodities.

Regarding number 2, do you have any examples of 1256 transactions that wouldn't be included in the summary of aggregate futures profit/loss for the year on your 1099? The instructions aren't saying that you have to list all transactions just because they're not detailed on your 1099; it's saying that if you have any transactions that are not reflected in your 1099 aggregate profit/loss number then those transactions need to be listed because a broker didn't provide you with an aggregate figure (i.e., no one was keeping score for you). It's entirely possible that I'm wrong since I'm a programmer and not an accountant, but I can't imagine how, under normal circumstances, you would end up with any transactions like that.
 
Quote from JangoFolly:

Regarding number 2, do you have any examples of 1256 transactions that wouldn't be included in the summary of aggregate futures profit/loss for the year on your 1099?
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Yes. Index options trades for one. Also options on futures.
These are not included on 1099
 
Quote from OptionsWizard:

Yes. Index options trades for one. Also options on futures.
These are not included on 1099
More...

Are you saying that a) the transactions are not listed individually on your 1099, or...

b) that the profit and loss dollar amount of those trades is not included in the dollar amount for aggregate futures profit/loss?


Who is your broker?
 
In defense of the CPA, futures traders aren't exactly a dime a dozen in the population.

I tell people I trade futures and 99.5% of them have no clue what I do.

The CPA should have said that he would research the issues and then dive in. Reality is futures trade reporting isn't all that difficult, just need to know what forms to use.
 
There may be a few exeptions to the P/L.

For example, I believe Single Stock Futures on individual equities in the US are treated differently than broad based equity futures like YM, ES, NQ, etc...

... but I doubt anyone trades those here.
 
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