Filing tax return as Trader Status and Mark to Market Election

bmm.trading · Apr 14, 2010

Quote from ProGambler:

I am a CPA as well as a professional poker player and daytrader. What "opt789" said was right.

My tax advice is only for daytraders and not for investors.

1. It's too late to elect mark to market for your 2009 tax return. You had to make that election by April 15, 2009.

2. The main benefit of mark to market is that you can deduct all your stock losses instead of being limited to $3,000/year. So if your wife made $100K working and you lost $100K daytrading, you'd have no income and get a big refund for all the taxes your wife paid in. Also, the wash sale rules no longer apply if you make the election.

3. You also need to file an IRS form 3115 (change in accounting method). Why? Because you used to report your stock trades on Sch D as capital gain/loss and were limited to a $3K loss but once you elect mark to market you report your stock trades on Form 4797 as ordinary income/loss and you can deduct all your losses. That's a significant change in accounting method.

4. You elect mark to market by drafting a letter in MS Word and attaching it to your tax return or extension. In this letter called a 475(f) election you attach a statement that includes the following:

1. That you are making an election under section 475(f) of the Internal Revenue Code.
2. The first tax year for which the election is effective.
3. The trade or business for which you are making the election.
4. That the election only applies to securities and not to futures.

The statement should have been filed by April 15, 2009 for your 2009 tax return.

5. If you're going to form a business entity for your trading I recommend a S-corp. A C-corp has double taxation and an LLC pays high gross receipts fees. The benefit of forming a business entity is that it solidifies your business activities and expenses with the IRS. Running a $100 million in stock trades through your personal tax return is a big red flag to the IRS. Your new business entity will also need to make a mark to market election but does not need to file a form 3115 (b/c there was no accounting method you changed from).

6. Whether or not you made a mark to market election, you can write-off some expenses on your Schedule C of your tax return such as internet, WSJ subscription, stock seminars, margin interest, etc.

7. More info on daytrader vs. investor can be found here:
http://www.irs.gov/taxtopics/tc429.html

I don't want to answer everyone's PMs so don't send me any PMs.
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Newbie questions, for those of you that have done it ..

After forming your LLC for your trading, how you do go about your trades. Do you go to your retail broker and set up a new account under the LLC? Or would you just change your existing one to the new one?

I may be wrong but won't they ask for a SS# and wouldn't the LLC just link back to you?

And does anyone have experience with forming the LLC in Hong Kong or Singapore? Just looking for ideas to start with ..

Thanks

blacknewt · Apr 14, 2010

A US based broker will need the following in order to open an LLC trading account:

- Articles of Organization
- Operating Agreement
- Certification letter from the Department of State (Secretary of State)
- Listing of owners who own 10% or more with social security number and address
- Owners Driver License/Passport
- Financials (paperwork proving that you have a dedicated business LLC bank account that they will link to your LLC trading account)

bmm.trading · Jun 19, 2010

If trading through a retail broker, you can set up a LLC practically any state?
I rent a condo in Illinois, however I'm not sure how long I will stay..
I may want to use my parents address in another state..
I'm thinking I have to set up an LLC where ever I file my taxes..
I want to set up an LLC while I search for an accountant specializing in Trader Tax..

Any thoughts on that?

sf631 · Jun 20, 2010

To bmm's earlier question: yes you need to set up an account for the LLC. Don't think there's any way around that, your logic about it being solely yours notwithstanding.

bmm.trading · Jul 14, 2010

anybody have reviews or opinions of using the greencompany.com ?
are there any other recommendations if you have chosesn to use another company?

Redneck · Jul 14, 2010

BMM

I use them and I like them....

They are not the cheapest around â but they know their stuff

fwiw I switched from Traders Accounting over to Green and have not regretted it one iota

RN

piezoe · Jul 15, 2010

Quote from opt789:

There are definitely some major advantages to MTM for equities traders, like the big one you pointed out. This is exactly why the IRS is being so harsh to traders because instead of just being able to carry forward $3k in losses each year, those with MTM can claim huge refunds in certain cases. So the IRS says, hey we donât want to give back all this money right now so letâs prove this guy isnât really a Trader in Securities and then he canât use MTM.
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[italics mine.]

So this answers my question : apparently "trader status" with the IRS is necessary if you elect MTM accounting.
In other words, according to your post above, you can not elect MTM accounting unless you also satisfy the IRS requirements for "Trader Status."

I have, so far, not found a clear answer to this question in any IRS source. So, thank you.

bmm.trading · Aug 9, 2010

great thanks for you input..
how do you like the customer service?

Quote from Redneck:

BMM

I use them and I like them....

They are not the cheapest around â but they know their stuff

fwiw I switched from Traders Accounting over to Green and have not regretted it one iota

RN
More...

nbates · Aug 11, 2010

I used Green & Company 10-12 years ago when I first filed Market To Market election, gave the information they provided [the package] to My Accountant and it was a blessing...imagine it's still relevant and you will find they have what you need.

Bob111 · Aug 11, 2010

15 pages....all about how to elect youself as a trader and M2M...but what about if you stop your trading-how to "cancel" trader status and M2M election?