For a trader that does 1000s of short-term trades per year, does very few long-term trades, and does not have a tax-loss carryforward, what is the downside of electing mark-to-market? Do traders have experiences which led them to conclude that electing MTM was beneficial or harmful to themselves? (A search of past threads seemed inconclusive to me.) Thanks.
I asked a really good trader CPA this question. His answer: Take it, because it's free loss insurance. If you lose it, you can deduct it against other income or carryforward. If you don't you could be limited in what you can write off in a single year. I DID NOT elect MTM-against my CPA's best advice. Why? Simply because I believe that the IRS will be closing the "trader's loophole".....and those who elect MTM will automatically be making "EARNED INCOME" one day. Dealers are already taxed this way & MTM is the standard accting. method for them. Once you elect MTM....there isn't any practical going back to another method-The IRS makes this very clear. I'm not worried about losses as much as IRS tax code change- to close in on professional traders---if it's considered a business, then shouldn't those engaged in enough trading be subject to FICA???!!! Remember investors & some traders use the cash method......hmmmmm......if FICA is imposed on "traders".......maybe I'll "revert" to being n "investor"......can't with MTM & still be a "trader" My reason is a bit of a weak one......but it's the only one against MTM that I can find.
- an MTM trader with a loss for the year is able to deduct his loss fully against his other income, or against his spouse's income (in a joint filing). In addition, a net operating loss from his trading business can be carried back two years by re-filing for those years, and/or carried forward 20 years. - One important thing you need to remember before electing MTM accounting: if you have accumulated net capital losses to carry forward from previous year(s), these are only deductible against capital gains Once you switch to MTM accounting, all your future profits will be ordinary income - therefore you would not able to utilize your carryforward losses, unless you have other sources of capital gains. - MTM election can only be revoked under rare special circumstances, so it not a step to be taken lightly. Please make sure this is appropriate for your situation but there are more help available than before http://www.dogpile.com/info.dogpl/search/web/mark+to+market+loss+carry+forward
If the IRS changes trading income to earned income, then individual traders get the benefits of retirement accounts (unlike now since the income is not earned). So good would come with the bad. I like it the way it is though.
One more thing. Even though you declare mark-to-market, you can designate accounts as investment accounts (and they would be reported on Schedule D).
If you are a futures trader your tax treatment comes under IRS section 1256 which means that net gains and losses are classified as 40% short term and 60% long-term. In this case MTM could cost you if you have profits. You really need to spreadsheet it out and understand the issues as it is not a casual ET forum type of decision. You may want to check out Green Trader Tax as they have a consultation rate that seems very reasonable to me. http://www.greencompany.com/ You could also post the same question to their message board I believe. Another good treatment of MTM can be found at: http://www.traderstatus.com/mark2mkt.htm and http://www.traderstatus.com/futures.htm Good luck,
When they say MTM is irrevocable, does that just apply to past gains/losses that have already been reported on Sched C (converted from sched D)? I am seeking to revoke my MTM status for the coming tax year 2004 since I have switched over to trading only futures and on a longer time frame, and would like those gains to show on Schedule D as capital gains. I am not trying to convert past gains/losses over to schedule D, just the coming year. How difficult is it to switch back to non-MTM accounting?