Mark-to-Market

Discussion in 'Professional Trading' started by MGB, Aug 12, 2001.

  1. MGB

    MGB

    I recommend GreenTraderTax.com for detailed information. I purchased his "2001 GTT Trader Tax Law Guide". I'm confident with the information and I understand clearly how the tax laws work for me as a trader.

    Just to be brief...

    <b>What's the advantage if you declare Mark-to-Market (MTM) for your taxes?</b>

    MTM only applies to your trading gains and losses.

    Your trading gains and losses are reported as "ordinary income - gains and losses".

    All trading losses are deductible.

    All trading expenses are deductible.

    <b>What happens if you don't declare Mark-to-Market?</b>

    Your trading gains and losses are reporting as "capital gains and losses". As you may know, Capital Gains are taxed at a higher rate than Ordinary Income. Thus, this is why MTM is a great benefit for traders where we have the ability to declare all trading gains and losses as Ordinary Income. Trading is what we do for a living, therefore it should be treated as Ordinary Income, but only if you elect MTM tax treatment.

    MGB
     
  2. tymjr

    tymjr

    Ordinary Income (OI) is taxed at a higher rate than Long Term Capital Gains (LTCG).

    If taxable income falls within 15% bracket then LTCG = 10%

    If taxable income falls within 28% bracket then LTCG = 20%

    Thereafter, regardless of your tax bracket LTCG = 20%

    Short Term Capital Gains are taxed at the same rate as OI.

    “Before counting any capital gain, your taxable income is in the 15% bracket, $4,000 below where the 28% bracket begins. You have a $10,000 long-term capital gain. The first $4,000 of this capital gain falls into the 15% bracket and is taxed at 10%. The rest is taxed at 20%.”

    The primary benefit in electing Section 475 (MTM) is the ability take unlimited losses against OI within the same year. You are chosing to be treated much like a dealer, in that securities are not capital assets and profits or losses are ordinary income or losses. Otherwise, you are limited to a $3,000 capital loss deduction beyond that used to offset your capital gains in the same year. The rest must be carried forward.

    “In 1999 Bill had a $4,000 capital gain, and a capital loss of $11,400. He used $4,000 of the capital loss to offset the capital gain: that left a net capital loss of $7,400. He claimed $3,000 of the loss on his 1999 return. The effect was to reduce his taxable income by $3,000. Bill was in the 31% bracket, so the loss decreased his 1999 income tax by $930. The remaining $4,400 of capital loss carried over to his 2000 return.”

    The quoted examples are not mine, but they were so damn lucid I couldn’t improve on them.
     
  3. bro59

    bro59

    Also see the Fairmark.com website for information on filing as a trader, and the mark-to-market election.
     
  4. roger2

    roger2

    How does one elect MTM? Is there a form for this?

    Is it too late to choose MTM for 2001 taxes?

    How does the self-employment tax apply to traders who use MTM and is this any different than if MTM is not chosen?

    Thanks in advance...
     
  5. Sanjuro

    Sanjuro

  6. MGB

    MGB

    There are no self-employment taxes for Traders in Securities.

    MGB