Question about Taxes and MTM

[sfbayarea]

Hi All,

I'm an active day trader. Before this year, I day traded all the time on my only trading account. I held no positions going into this year. However this year, there is a stock that I wanted to keep long term. I have over time accumulated a 10k share position on the stock in my trading account. But along the way, I have also day traded the same symbol when I saw fit (bullish only). My account is set for MTM method of accounting as I gave the IRS a notice over a year ago. Will I have to pay taxes on those unrealized gains at the end of the year even if I don't sell those 10 k shares if the prices are higher at the end of the year? Someone at my brokerage told me I would have to under MTM accounting. I would prefer to hold those 10 k shares for over 3-4 year period to pay only 15% on long term capital gains taxes. I am looking to hold this stock because I believe it would jump by a large fold long term.

As anyone held a stock symbol long term while also day trading the same stock on an account? What is the best way to hold this stock long term to pay minimal taxes? I don't mind taxes personally but it's the housing that is too expensive to buy (that's my grudge). Home prices are too high in CA and don't seem to come down. Trying to save up to buy a house.

Any advice would be much appreciated. Thanks

 

[BMK]

Here's what it says on page 68 of IRS Publication 550:

If you made the section 475(f) mark-to-market election, you should report all gains and losses from trading as ordinary gains and losses in Part II of Form 4797, instead of as capital gains and losses on Form 8949 and Schedule D (Form 1040 or 1040-SR). In that case, securities or commodities (depending upon which election was made) held at the end of the year in your business as a trader are marked to market by treating them as if they were sold for fair market value on the last business day of the year and gain or loss is recognized. But do not mark to market any securities or commodities you held for investment. Report sales from those securities or commodities on Form 8949 and Schedule D (Form 1040 or 1040-SR), as appropriate, not Form 4797. See the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040 or 1040-SR).

BMK

 

[sfbayarea]

Thanks BMK for your response. So for my situation, I have bought and kept shares at various dates of that stock, while I have also day traded the same symbol. I have done a ton of trades for that symbol (A lot). This is in the same account. So do I basically need to go back and do a spread sheet and separate the day trades from the days where I have kept shares? And list the day trade totals for that stock in form 4797? Also for investment purposes and even though I will not sell my an accumulated 10K shares in the stock, do I need to list the cost basis on form 8949 even though I have not sold? This is the first year where I have decided to invest in a stock besides just day trading.

This would be a lot simpler if I did not day trade shares of the same symbol along with deciding to keep a long term position in it. I'm sure it's not the first or last time that someone has done this. It would be great if anyone that's done that same thing can lend any advice on how to do this. I could also disclose the stock symbol in return as a symbol of appreciation.

 

[BMK]

do I basically need to go back and do a spread sheet and separate the day trades from the days where I have kept shares? And list the day trade totals for that stock in form 4797?

You have the right idea. But it's not about "the days where I have kept shares." You need to identify which shares you are holding long term for investment.

Because you made the mark-to-market election, in general, anything you are holding at the end of the year will be treated as if it were sold at the end of the year, and you report the gain or loss on Form 4797. But those shares that you are holding as a long term investment will not be treated as having been sold, and they will not be reported on Form 4797.

do I need to list the cost basis on form 8949 even though I have not sold?

No. Form 8949 is only used to report sales.

BMK

 

[sprstpd]

Hi All,

I'm an active day trader. Before this year, I day traded all the time on my only trading account. I held no positions going into this year. However this year, there is a stock that I wanted to keep long term. I have over time accumulated a 10k share position on the stock in my trading account. But along the way, I have also day traded the same symbol when I saw fit (bullish only). My account is set for MTM method of accounting as I gave the IRS a notice over a year ago. Will I have to pay taxes on those unrealized gains at the end of the year even if I don't sell those 10 k shares if the prices are higher at the end of the year? Someone at my brokerage told me I would have to under MTM accounting. I would prefer to hold those 10 k shares for over 3-4 year period to pay only 15% on long term capital gains taxes. I am looking to hold this stock because I believe it would jump by a large fold long term.

As anyone held a stock symbol long term while also day trading the same stock on an account? What is the best way to hold this stock long term to pay minimal taxes? I don't mind taxes personally but it's the housing that is too expensive to buy (that's my grudge). Home prices are too high in CA and don't seem to come down. Trying to save up to buy a house.

Any advice would be much appreciated. Thanks

My advice to you is to open a new account just for investments and transfer that 10k share position into the investment account. Or sell it from the trading account and buy it in the investment account. That way you keep your trading activity and investment activity in separate accounts. Even with this precaution the IRS can claim that you are investing in your trading account or trading in your investment account if you happen to be trading the same symbols in each. And they will most likely choose the point of view that makes you pay more taxes.

Here is an article on this subject:

https://greentradertax.com/irs-plays-havoc-with-traders-misidentifying-investments/

I don't agree with all of the article's conclusions as I've read the tax code on this subject and it seems very subjective. For example, suppose I held 1,000 shares of MSFT in an investment account for 10 years and I day-traded MSFT in a mark-to-market account 100 shares at a time. I think the IRS would be hard-pressed to say the day-trading of that position has any linkage to the investment. But that doesn't mean they won't try. It all depends on how "safe" you want to be in terms of tax reporting.

 

[BMK]

Or sell it from the trading account and buy it in the investment account.

If he sells it, that will trigger tax on the capital gain. And that's what he's trying to avoid.

My advice to you is to open a new account just for investments and transfer that 10k share position into the investment account... That way you keep your trading activity and investment activity in separate accounts.

Having two separate accounts--one for active trading and the other for long term investment--is a good idea, and it can help avoid problems.

But some guys may need to keep everything in one account. They may be using the equity of their investments for margin in their active trading. And they may need the equity from their investments to maintain the $25K minimum for day trading.

BMK

 

[sfbayarea]

I concur with BMK on this.. I have a margin account and so everything is in this stock. In fact, I owe the brokerage 12k for holding more shares than I have in cash. My day trading profits do go to pay off the loans however. This is done slowly as I don't make large sums of money trading. I really don't want to sell and switch to another account and refund this one because it would take too long in case the stock jumps. I don't think this year will be an issue since my gains won't be too big. The IRS is only interested in large tax returns trying to get the most back from someone. Unless, the stock jumps to 100/per share by the end of the year, I think I am ok from this for this 2020 year if I did what BMK mentioned.

 

[sprstpd]

I concur with BMK on this.. I have a margin account and so everything is in this stock. In fact, I owe the brokerage 12k for holding more shares than I have in cash. My day trading profits do go to pay off the loans however. This is done slowly as I don't make large sums of money trading. I really don't want to sell and switch to another account and refund this one because it would take too long in case the stock jumps. I don't think this year will be an issue since my gains won't be too big. The IRS is only interested in large tax returns trying to get the most back from someone. Unless, the stock jumps to 100/per share by the end of the year, I think I am ok from this for this 2020 year if I did what BMK mentioned.

As I said in my original post, you can transfer rather than sell so there is no tax event. I doubt the IRS will look favorably on your current setup but I'm not a tax expert.