Mark-to-Market

M

MGB

I recommend GreenTraderTax.com for detailed information. I purchased his "2001 GTT Trader Tax Law Guide". I'm confident with the information and I understand clearly how the tax laws work for me as a trader.

Just to be brief...

<b>What's the advantage if you declare Mark-to-Market (MTM) for your taxes?</b>

MTM only applies to your trading gains and losses.

Your trading gains and losses are reported as "ordinary income - gains and losses".

All trading losses are deductible.

All trading expenses are deductible.

<b>What happens if you don't declare Mark-to-Market?</b>

Your trading gains and losses are reporting as "capital gains and losses". As you may know, Capital Gains are taxed at a higher rate than Ordinary Income. Thus, this is why MTM is a great benefit for traders where we have the ability to declare all trading gains and losses as Ordinary Income. Trading is what we do for a living, therefore it should be treated as Ordinary Income, but only if you elect MTM tax treatment.

MGB
 
Originally posted by MGB
Capital Gains are taxed at a higher rate than Ordinary Income.
More...

Ordinary Income (OI) is taxed at a higher rate than Long Term Capital Gains (LTCG).

If taxable income falls within 15% bracket then LTCG = 10%

If taxable income falls within 28% bracket then LTCG = 20%

Thereafter, regardless of your tax bracket LTCG = 20%

Short Term Capital Gains are taxed at the same rate as OI.

“Before counting any capital gain, your taxable income is in the 15% bracket, $4,000 below where the 28% bracket begins. You have a $10,000 long-term capital gain. The first $4,000 of this capital gain falls into the 15% bracket and is taxed at 10%. The rest is taxed at 20%.”

The primary benefit in electing Section 475 (MTM) is the ability take unlimited losses against OI within the same year. You are chosing to be treated much like a dealer, in that securities are not capital assets and profits or losses are ordinary income or losses. Otherwise, you are limited to a $3,000 capital loss deduction beyond that used to offset your capital gains in the same year. The rest must be carried forward.

“In 1999 Bill had a $4,000 capital gain, and a capital loss of $11,400. He used $4,000 of the capital loss to offset the capital gain: that left a net capital loss of $7,400. He claimed $3,000 of the loss on his 1999 return. The effect was to reduce his taxable income by $3,000. Bill was in the 31% bracket, so the loss decreased his 1999 income tax by $930. The remaining $4,400 of capital loss carried over to his 2000 return.”

The quoted examples are not mine, but they were so damn lucid I couldn’t improve on them.
 
How does one elect MTM? Is there a form for this?

Is it too late to choose MTM for 2001 taxes?

How does the self-employment tax apply to traders who use MTM and is this any different than if MTM is not chosen?

Thanks in advance...
 
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