Mark-To-Market

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.

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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Perhaps you have been thinking about this in terms of your own trading and applying that to your conclusion?

Even if the "deductng of Schedule D unused carryover losses from previous year is significantly restricted", I have none.

I trade a pool of stocks frequently and in pairs. By nature, a lot of them will incur losses and in the big picture, this is irrelevant since I am pulling out far more gains than realized losses.

However, at the end of the year, without MTM status, I am losing the ability to trade these Wash Sale candidates for a month. Even worse, if this removes more of the over (or under) valued group, I'm also losing the ability to select the best pairs, thereby further limiting my potential.

As for "considering an alternative trade or business," my goal for this month is to maintain the rate of gain that I achieved last year not limit it, let alone look for another line of work that will take years to achieve what has been done in months LOL.

And though I mostly agree with you that tax considerations should not determine buy/sell/hold decisions, that is more relevant to every day investors. When you start cranking out some size, it maginfies the problem.

For example, if a series of pairs over several months generated $50,000 in gains while racking up $20,000 in losses, would you want to pay taxes on $50,000 in '08 and defer a loss of $20,000 to '09? I surely wouldn't, hence the consideration of MTM status. In reality, I had about $35,000 in realized losses in December and I don't know how much carryover loss exists from November so it's more than pocket change that I'm concerned with. Therefore tax decisions are determining my B/S/hold options.

Thanks for your comments.
 
1) Your ability to deduct Schedule D unused carryover losses from previous years will be significantly restricted/
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BTW, can you clarify this statement?


My understanding of MTM status from one of the web sites someone posted is that:

1) Gains and losses from trading are treated as ordinary income (a drawback)

2) The limitation on capital losses does not apply ($3000)

3) Losses can be carried back two tax years. If you have no other income to offset this large loss this year, you may amend the previous two years tax returns and get a refund.

Comments?
 
Does mark to market accounting carry forward?

IE if in 2008 you have a loss of $200,000 and other income of $50,000, will you be accredited with a loss of $150,000 going forward to 2009?

IE If in 2009 you make $150,000 from trading, does the net loss from 08 carryover and cancel it out?
 
AND , if one has a loss in 2008 that they want to carry back against income in the two PRIOR tax years.......is that only if you were using mark-to-market accounting in 2006 or 2007 also; and can you only carry your 2008 loss back to offset TRADING gains you had in 2006 and 2007 or can you carry back your 2008 mark-to-market losses against income you had earned in other jobs in 2006 and 2007?
 
Regard the previous two posts, here's some info that I ran across. I neither attest to it's veracity nor do I understand a lot of the stuff I read :)

1) If you're a trader, you're likely to be able to claim more deductions than an investor. Some deductions that would be claimed as itemized deductions subject to various limits will be allowed as business deductions, without such limits. And there are some deductions traders can claim even though investors can't claim them at all.

In addition, traders are eligible to make the mark-to-market election. If you make this election, your trading losses won't be subject to the $3,000 capital loss limitation. This limitation can be very painful for a trader who has a bad year.


2) Mark to Market accounting provide a type of "tax loss insurance" as losses can be carried back two tax years. This is great news for active traders, who may have made a killing for one or more years only to have a substantial loss the following year. If you have no other income to offset this large loss, you may amend the previous two years tax returns and get a refund!
 
Quote from spindr0:

Regard the previous two posts, here's some info that I ran across. I neither attest to it's veracity nor do I understand a lot of the stuff I read :)

1) If you're a trader, you're likely to be able to claim more deductions than an investor. Some deductions that would be claimed as itemized deductions subject to various limits will be allowed as business deductions, without such limits. And there are some deductions traders can claim even though investors can't claim them at all.

In addition, traders are eligible to make the mark-to-market election. If you make this election, your trading losses won't be subject to the $3,000 capital loss limitation. This limitation can be very painful for a trader who has a bad year.


2) Mark to Market accounting provide a type of "tax loss insurance" as losses can be carried back two tax years. This is great news for active traders, who may have made a killing for one or more years only to have a substantial loss the following year. If you have no other income to offset this large loss, you may amend the previous two years tax returns and get a refund!
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I see, so mark to market does not carry forward.
 
Quote from dumbgai:

I see, so mark to market does not carry forward.
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I'm not sure that's the case. Here's some more cut and paste info :)


First of all, an MTM trader is truly in the business of trading! This means, that his trades generate no capital gains or losses - rather, all his transactions are reported on Form 4797, then transferred to Schedule C as ordinary income or loss (A memo to IRS must be included, explaining the procedure). To him, winning trades are simply income, losing trades are a loss to be deducted from his income. He need not worry about the $3000 net loss limitation that applies to investors and traders.

At the same time, the MTM election means loss of the tax shelter on existing positions - the MTM trader reports not only his completed trades' income and losses, but also the unrealized income or losses on any positions open at the end of the year. This is where the common name of the election come from - the trader marks to market value his open positions at the end of the year and reports the unrelialized profits and losses in his Schedule C for that year.

Because his activities result in ordinary income or loss, an MTM trader with a loss for the year is able to deduct his loss fully against his other income, or against his spouse's income (in a joint filing). In addition, a net operating loss from his trading business can be carried back two years by re-filing for those years, and/or carried forward 20 years.

Because of the different tax rates on ordinary income and capital gains (especially long term), the MTM trader needs to ensure that his investments (if any) are segregated in a separate brokerage account from his daily trading, to ensure proper accounting. That way, the MTM trader can continue to take advantage on the long term capital gains tax rates on his investments.

Wash sale rules have no impact on the trader who has elected Mark to Market accounting
 
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