Trader Status and Taxes

8

8hcap

I have read that if a trader gains Market to Market status, registers as a professional trader, that taxation is no longer capital gains/losses but is taxed as ordinary income. I don't have the references handy to give the exact quotes, but that was the jist of the read.

My question pertains to existing capital losses (which I have plenty of unfortunately). If I remain as I am (not registered pro) I can offset all of my daytrading gains directly against those losses, and basically not pay any tax. If I do attain trader status and therefore get taxed as ordinary income on gains, would I then lose the ability to work against those losses, and therefore only be able to deduct the 3k/year figure?
 
Nope. Ordinary income cannot be offset with capital losses.

And it isn't "trader status" that makes your profits ordinary income, it is electing mark to market.

I suggest you get a copy of Ted Tesser's book or read the Green Company articles from Active Trader Magazine. Trader status and mark to market are important, complex decisions.
 
Just a word of advice: Don't hire one of the "traders only" tax people to actually do your taxes. Or if you do be very careful about how much they'll charge you and for what. I had one of the worst experiences of my life last year dealing with this. I'm too tired now to get into it but will before tax season. I've already discussed this in more detail with several others in these forums.

Also see the Trader Taxation / CPA Experiences thread at http://www.elitetrader.com/vb/showthread.php?s=&threadid=9377&highlight=CPA
and my original post which said:
"11-18-02 01:20 PM
Bad Experiences
I'm so glad this thread has materialized. Thanks for starting it, limitdown. I've had some VERY BAD experiences in regards to this that I'd like to share, but I don't have the time to write a long post right this second. My experiences have to do with just what you were talking about in your initial post, limitdown and I'd like to help save other traders from going through the grief I did last year in regard to this. I'll try to be back later or by tomorrow and post more. But for now will say be very careful who you engage in
relation to this."
 
you are allowed to specify an account as a long term account when you make the mark to market election.you can offset your prior losses to that account.
personaly i dont see a reason to elect mark to market until you have used up your prior losses and are profitable.i see no benifit to electing mark to market if you are not profitable.
 
Quote from vhehn:

you are allowed to specify an account as a long term account when you make the mark to market election.you can offset your prior losses to that account.
personaly i dont see a reason to elect mark to market until you have used up your prior losses and are profitable.i see no benifit to electing mark to market if you are not profitable.
More...

Yes, this is very important and I've mentioned this fact in other threads. It appears some people don't understand that being MTM may not apply to all accounts. You designate the accounts which will carry MTM.

Later,

Cracked
 
Quote from crackedback:



Yes, this is very important and I've mentioned this fact in other threads. It appears some people don't understand that being MTM may not apply to all accounts. You designate the accounts which will carry MTM.

Later,

Cracked
More...

Agreed, that is a great input. Thanks, all.
 
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