tax problems

P

praetorian2

Hi,
I told my dad to fill out my taxes last year and declare market to market status which he did not do. Do I have any options now? What are the ramifications of not being mtm. My dad has no idea of what stocks I currently hold that he bought me over the past 20 years. What can I do about this as well, as it's difficult to do taxes if my father refuses to give me all the information I need.
 
that the mark-to-market option must be elected in the year prior to trading.

What you really need to do is speak with a tax professional (an attorney or accountant) about this, right now.

Don't mess with the IRS, they can hurt you!
 
I am making the election this year as well. I just got about 25 pages of legal history and challenges on mark-to-market status. I'm no expert by any stretch, but I should be able to answer any questions you might have after studying this for the past few months.
 
Originally posted by praetorian2
how harmful is the wash sale rule to me if i'm not mtm. I have traded the same dozen or so stocks for months.
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You have to be careful. The problem is that you'll not be allowed to take losses in securities you've rebought within +- 30 days. The losses will be used to adjust the cost of the securities and moved to 2002. As an example if you had $100 gain and $200 loss, but was caught by washloss, you would get taxed on $100 income in 2001 (despite your actual loss) and the -$200 is moved to 2002 tax year. This all assumes that that win and loss was in one security.

I trade a small basket of stocks and cannot afford to not book my losses at face value. For that reason I don't trade in December at all. Alternatively, you can just not trade securities you traded in December of 2001 in January of 2002. Same effect.

Personally, I want the benefits of holding my investments, so mark-to-market is not really an option I'd like to use.
 
vikana,

if you don't carry any positions over to the new year, the only wash sale issue arises if you buy something in January you took a loss on in December, is that right?
 
MTM does allow you to hold certain investments and benefit from long term capital gains. You must designate the security as such prior to buying it and the IRS recommends keeping non-MTM securities in a separate account. Wash sale rules apply on non-MTM securities.
 
Originally posted by AAAintheBeltway
vikana,

if you don't carry any positions over to the new year, the only wash sale issue arises if you buy something in January you took a loss on in December, is that right?
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AAAintheBeltway:

That is my understanding. Since I trade the same small portfolio (~10 stocks) I would typically have both wins and losses every month in every stock and hence simply don't trade in December. For next year I'll re-open a futures account and just do mini's in December.
 
Section 475 of the IRC describes MTM accounting practices for traders. You should be able to get a private letter ruling from the IRS as to whether or not you qualify as an active trader. Most CPAs or tax attorneys could help you with this, which I would recommend since this is the type of thing that may cause you to be audited in the future.

This would allow you to mark to market a trading portfolio as a whole and I don't think the wash sale rule would apply. Additionally, all trading expenses are taken on Schedule C directly against trading income. If you hold a separate portfolio identified as long term, you can still report these gains and losses on schedule D.

The downside to this is once you elect MTM you must use it as long as you continue trading. Meaning that if we ever see a year like 1999 again, and Im praying, you would have to report gains that would otherwise not have been realized.

For someone like me who does long and short term trading the notion of going to MTM does not seem like the best idea. Investment expenses are subject to a 2% floor on income, but I really don't spend that much. And the wash sale rule is not to hard to work around. For instance if you are holding or trading tech stocks with losses, you could swap for the QQQ or XLK and take a loss. The key is to avoid buying a security that is Substantially Identical to the one being sold.

The JK Lasser tax guide is one of the best quick references that I have found, it is about 15$ at most book stores for use in preparing taxes.

Best luck and a safe and happy new year to all.
 
I probably have a somewhat simplistic view on this, but I really feel that MTM and electing trader status easily can become an expensive proposition.

If you don't elect MTM accounting all profit/losses are on schedule D and are not subject to self-employment tax/social security. That's a 15% savings. Depending on CPA and local IRS they may insist that anyone in the "business of trading" pay self employment tax, just like consultants and other self employeed people. The only practical issue is wash-loss, and I've posted on that earlier on this thread.

I personally don't care about writing off my $5/day quote feed, DSL and computers. If I can't overcome $10/day base cost of doing business, then I shouldn't be doing it anyway.

Also, I really want long-term cap gains on my investment holdings.
 
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