Mark-To-Market

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spindr0

I'm considering filing for MTM accounting with the IRS. I've read a number of web sites (Fairmark, etc.) and I think that I understand the concept as well as the benefits. I'd appreciate any comment regarding any pitfalls you've run into if you've elected this method. A coupla basic questions...

1) "MTM election can only be revoked under rare special circumstances, so it not a step to be taken lightly. Please make sure this is appropriate for your situation."

If you're allowed to segregate accounts and use MTM accounting for the day trading and longterm capital gains tax rates on your investments, what's the problem? How could this bite me in the xxx ?

2) "The biggest disadvantage of filing as a trader is audit risk. There are no clear standards for determining whether you are a trader. If you claim to be a trader, and the IRS determines that you are not a trader, you may end up with substantial liability for tax, interest and penalties."

I assume that because I trade heavily, I qualify, but how do I make sure that my assumption is correct?


My main reason for considering MTM is the suspension of the Wash Sale Rule. It's a royal pain at the end of the year and crimps my activity in January.
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Also, I've been doing my own taxes for years since other than my Sched. D, they're pretty straightforward. Do I need to find a CPA for this? Or a CPA who specializes in day trading? Or is this just all a formaility once you file for MTM staus? TIA
 
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I'm considering filing for MTM accounting with the IRS. I've read a number of web sites (Fairmark, etc.) and I think that I understand the concept as well as the benefits. I'd appreciate any comment regarding any pitfalls you've run into if you've elected this method. A coupla basic questions...

1) "MTM election can only be revoked under rare special circumstances, so it not a step to be taken lightly. Please make sure this is appropriate for your situation."

You have to get permission from the IRS to revoke it.

If you're allowed to segregate accounts and use MTM accounting for the day trading and longterm capital gains tax rates on your investments, what's the problem? How could this bite me in the xxx ?

There is no problem. You won't get "bit" provided that you keep good records and separate your day trading and long term investment accounts. You can accordingly use MTM for you day trading account and long term capital gains tax rates for your investment accounts.

2) "The biggest disadvantage of filing as a trader is audit risk. There are no clear standards for determining whether you are a trader. If you claim to be a trader, and the IRS determines that you are not a trader, you may end up with substantial liability for tax, interest and penalties."

I assume that because I trade heavily, I qualify, but how do I make sure that my assumption is correct?

If you trade "heavily" and consistently throughout the year you would qualify. The question here is what would be considered "heavy"? From a stock trading perspective, I would proffer that if you traded approximately 10,000 -15,000 shares a day consistently throughout the year you should easily qualify. The other factor to take into consideration would be - Is trading your sole source of livelihood? If you are working a part-time job and trading at the same time for instance, it very well could raise a red flag with the IRS.
Unfortunately, as you pointed out there are no "clear standards" and the IRS depends quite a bit on case law which is nebulous to say the least.


My main reason for considering MTM is the suspension of the Wash Sale Rule. It's a royal pain at the end of the year and crimps my activity in January.


Also, I've been doing my own taxes for years since other than my Sched. D, they're pretty straightforward. Do I need to find a CPA for this? Or a CPA who specializes in day trading? Or is this just all a formaility once you file for MTM staus? TIA

Wash sales are a pain. With MTM you would be saving a lot in taxes since your gains and losses are treated as ordinary gains and losses. My recommendation is thay you should find a CPA who specializes in day trading for numerous reasons. As an example, determining whether you qualify for MTM status based on your trades, attaching written explanations to your return, where necessary, in support of your position etc.
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If you trade "heavily" and consistently throughout the year you would qualify. The question here is what would be considered "heavy"? From a stock trading perspective, I would proffer that if you traded approximately 10,000 -15,000 shares a day consistently throughout the year you should easily qualify.
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OK, dumb question. Do you count the buys and the sells or just the round trip as total shares traded? I'm at 7,500 per day if it's the round trip otherwise it's 15,000 per day.

Yep, I'll look for a CPA who specializes in day trading. I don't know any local day traders so I'll try the local bean counter society and see if they have any leads.

Thanks for your comments.
 
Quote from spindr0:

OK, dumb question. Do you count the buys and the sells or just the round trip as total shares traded? I'm at 7,500 per day if it's the round trip otherwise it's 15,000 per day.

Yep, I'll look for a CPA who specializes in day trading. I don't know any local day traders so I'll try the local bean counter society and see if they have any leads.

Thanks for your comments.
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My figures were approximate and based on round trips. However, imo you should be okay, provided that you traded consistently throughout the year. You can PM me if you need help with picking an appropriate CPA since I would be violating the rules of this site by mentioning the name publicly.
 
I have thought about this for a long time. Frankly, I don't see any reason to make the mark to market election. Main advantage would be the ability to deduct unrealized losses at December 31. However, there are two things which offset this advantage:

1) Your ability to deduct Schedule D unused carryover losses from previous years will be significantly restricted, and

2) If you are in the business of trading and are incurring consistent losses in excess of your gains, perhaps you might wish to consider an alternative trade or business.

Good luck and have a very profitable 2009.

4Q

PS: I strongly believe that a buy, sell, or hold decision on any traded security should be based on factors totally apart from tax considerations.
 
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