Are you asking for the "real" purpose of the wash sale rule?
Robinhood daytrader owes 800K to IRS on a profit of 45K
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"The wash sale rules do not apply to a dealer in stock or securities."
Didn't say it did - I gave the justification and the mixed straddle rule was the "solution". MMs would simply buy a mixed straddle near year-end and the lift the losing side in the current year and the sell the winning side next year. Part of the reason the rule forces mark to market at year-end.
Your explanation is spot on - the IRS doesn't want non economic losses.
The industry got a huge expansion of 1256 security position limits.
Be careful what you wish for there has always been talk about modifying 1256 to real hedges only.
Didn't say it did - I gave the justification and the mixed straddle rule was the "solution". MMs would simply buy a mixed straddle near year-end and the lift the losing side in the current year and the sell the winning side next year. Part of the reason the rule forces mark to market at year-end.
Your explanation is spot on - the IRS doesn't want non economic losses.
The industry got a huge expansion of 1256 security position limits.
Be careful what you wish for there has always been talk about modifying 1256 to real hedges only.
I don't have a strong personal opinion on this. I do not claim trader tax status or use the mark-to-market election. My own trading is subject to the wash sale rules. But it doesn't affect me very often. I'm only explaining the IRS position and the theoretical rationale for the rule. I am a professional tax advisor. Day trading is not my area of specialization, but I understand most of the relevant issues in tax law.
It sounds like you are arguing that a taxpayer should simply be allowed to use his unrealized loss at the end of the year. If you sell the stock and buy it back 18 seconds later, then you didn't really sell it. You engaged in a technical manipulation to put the loss on the books. If you are going to allow that, then you could just let the taxpayer claim the unrealized loss at the end of the year, and adjust their basis. There would be no need for selling the stock and buying it again.
That's a reasonable approach, but if you are going to allow someone to claim an unrealized loss when determining their income at the end of the year, then that taxpayer would also have to include any unrealized gains.
And taxpayers can actually do this by making the mark-to-market election.
But you can't use an unrealized loss to lower your income without also including unrealized gains.
BMK
at the end of the year. You will sell all your losers and some of your winners to create zero tax liability and then re-buy them all at new basis. It’s a way to defer taxes without taking any economic risk the irs doesn’t like that.
you can retroactively declare yourself...based on what my tax accountant said to me...
Then fire him or her.
Maybe you can do that in terms of trading business expenses, but IRS will sue you if you try to deduct trading losses that way since it would go against everything the IRS is doing to prevent this. You'd be doing something that no one else is allowed to do.
And the rules are pretty clear:
https://www.irs.gov/pub/irs-pdf/i1040sd.pdf
"To be effective for 2020, the election must have been made by the due date of your 2019 return (not counting extensions)."
And here is related IRS ruling when someone tried to do that:
https://www.grantthornton.com/libra...ies-late-mark-to-market-election-request.aspx
and
https://www.irs.gov/pub/irs-wd/202048009.pdf
One more case is described here:
https://greentradertax.com/will-the-irs-deny-tax-benefits-to-traders-due-to-covid/
"Chen messed up many things in this case. First and foremost, he lied to the IRS about electing Section 475 MTM ordinary loss treatment on time and then used 475 MTM when he wasn’t eligible. Chen should have been subject to a $3,000 capital loss limitation rather than deducting a massive 475 ordinary loss triggering a huge tax refund. Second, he brought a losing case to tax court and made the mistake of representing himself. Once Chen was busted on the phony MTM election, he caved in on all points, including TTS. Chen did not have many TTS business expenses, so he figured it wasn’t worth continuing to fight."
[edit: maybe not sue but the IRS will penalize you with incorrect or late filing and late tax payment fees (since likely you’d owe them money in the end)]
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Guru is correct that the mark-to-market election cannot be made retroactively. There is an exception for a "new taxpayer," which means a newly formed business entity that is filing its very first tax return. But in general, the election must be made in advance, and it becomes effective for the following tax year.
With that being said...
The IRS does not sue taxpayers. They don't have to. That's not how the system works.
The IRS has the authority to audit your tax return, make corrections to anything they think is wrong, and simply send you a bill. They don't have to go to court.
If you disagree with the changes and the bill they send you, there is an appeals process within the IRS. If you go through that appeals process, and you don't like the results, then you have the right to sue the IRS, and you can try to convince the court that the IRS is wrong. But if you do nothing, the changes made by the IRS, and the tax bill, will stand. And after a certain period of time, you will lose your right to contest the amount you owe. Once that happens, the IRS can use their collection tools, such as liens, levies and garnishments, all without ever having to go to court.
When the IRS conducts an audit of a tax return, it is not a criminal proceeding.
The IRS does not have to prove anything beyond a reasonable doubt. You have the right to be represented by an attorney or an accountant, but the government will not pay for such representation. You don't get a public defender, even if you are penniless. You cannot invoke the fifth amendment right against self-incrimination. And the burden of proof falls on the taxpayer--not on the IRS--to show that they are entitled to any deductions.
BMK
Trader tax status and section 475 elections are not exactly the same thing. I said you can retroactively claim trader tax status. I agree that you can't do that for section 475 election. I just sent an email to my tax accountant to kill himself...are you available to do my taxes?
I like you.