Disadvantages electing Mark to Market?

Discussion in 'Trading' started by Vista, Mar 17, 2001.

  1. Vista


    I understand the advantages of electing to go with Mark to Market for tax purposes. Does anyone with experience know of any disadvantages?
  2. p2


    I happened to ask my account the same question and he said not really.
  3. RAY


    The only one I can think of is audit risk, and the need for specific seperation of securities.
  4. white17


    Sometimes I feel that having to account each year for holding long term positions ( years) SEEMS to be a disadvantage but it all evens out. One thing to consider is: If you have large UNREALIZED gains in the year you elect MTM it could be costly because you must report those gains even though they are unrealized.

    As far as an audit just be sure you are completely honest about eveything. You may still be audited but if everything is on the up and up you should be ok. This is one of the reasons I have my return prepared for me. It's been more than worth it.

  5. mjt


    Someone tell me if I'm wrong, but this is what occurred to me. If you elect M-M, your federal tax rate could be as high as 39%, if you earn enough money. (A few hundred thousand, I believe.) If you don't file M-M you would pay a flat 28% rate for capital gains. That's an 11% difference you pay for electing. Of course, you'd be screwed by the wash sale rule, and couldn't deduct expenses, but it seems like at some income level it might be be advantageous not to elect.
  6. white17


    I can't answer the hypothetical accounting question but I'll pose this one in response.

    If it was a disadvantage, would all the big guys on the floor and MM's etc have lobbied so hard to get MTM or would they stick with schedule D and the capital gains tax??

    I don't KNOW the answer but I strongly suspect it's in their interest to use MTM. That doesn't mean it's best for everyone though.

    Is that non-committal enough ? :))
  7. p2


    mjt. I don't believe that you would be stuck with the 38% tax bracket. If you file m-t-m, my understanding was that it essentially allowed you to count your gains, loses, and expenses like a business. So things like commision, data feeds would be expenses. Wouldn't the tax bracket depend on what you draw as a salary. I thought that the rest would be considered dividend income.

    Anyways, it's best to consult with your tax accountant.
  8. RAY



    I do not understand your question... Are you talking about short term capital gains, or long term?
  9. Dustin



    mjt is acutally right. I fell in that tax bracket for 2000, and was able to deduct any expenses (computers, monitors, DSL, books, etc).

    This year I plan on setting up an S-Corp because you can stash away $30k/year into a tax-free pension...at least until the money is withdrawn. You can also trade in that pension.
  10. mjt,

    You are mistaken. While it is true that long-term capital gains are taxed at a maximum rate of 28%, short-term capital gains are subject to the same rates as ordinary income. Thus, short-term capital gains could be subject to the 39% rate if one's taxable income is high enough.

    Moreover, "long-term" currently means holding a stock for more than a year, an interminable period for a trader.
    #10     Mar 18, 2001