Revoking MTM election

Discussion in 'Professional Trading' started by illiquid, Jul 3, 2005.

  1. As I understand it, if one currently trades only currency, commodity and index futures (section 1256 contracts), there really is no point (only a big disadvantage losing 60/40 LT/ST capital gains treatment) in MTM election as 1256 contracts have built-in 3-year carryback option on losses.

    Has anyone who's gone through the process of UN-electing IRC 475 MTM accounting have any advice? Can you just un-elect MTM accounting for section 1256 contracts, while keeping MTM for future potential stock transactions?
  2. To clarify - the "built-in" carryback provision for Sec 1256 losses is only allowed against 1256 gains.

    If you HAD a valid Sec 475(f)(1) M2M election for securities trading (though I think you are saying you are not a securities trader and therefore perhaps you do not have a valid M2M election for securities trading) - then yes you could seek to have your Sec 475(f)(2) M2M election for 1256 contracts revoked with the consent of the Secretary under 475(f)(3) - while leaving your valid Sec 475(f)(1) M2M election in place.

    But again, leaving it in place for "future potential stock transactions" is unchartered territory, not specifically covered by the IRS Code, Regs or Court decisions.

    A methodology to use is to form a separate taxpayer (entity) at the time you decide to do securities trading in the future, and then elect M2M at that time.

    Similarly, had you used a separate taxpayer (entity) to elect M2M for your 1256 trading it would be a simple matter today to simply stop using the entity and thereby the M2M election would go by the wayside. Future Sec 1256 trading to be done in a new separate entity, or as an individual if you choose.
  3. Thanks for the input.

    I traded only equities from 1999-2002, so I've used MTM accounting since 99. From 02 on I traded both, but have now moved exclusively over to 1256 contracts. It was my understanding that MTM election needed to be proactively removed, so I figured might as well leave it as is for equities and just remove the election from 1256 contracts. I understand that 1256 losses will only carryback against 1256 gains.

    Does this just involve a letter written to the IRS, or is there more to the process?
  4. It is not clear what happens to a valid securities trader M2M election when a trader in securities ceases to trade "temporarily" And it is even muddier what happens when the halt is in securities trading but commodities trading goes on.

    These issues will eventually be resolved (as are many IRS issues) by taxpayers who test the system.

    The safest method in your case might be to make a formal request of the Secretary to revoke the commodities election based on some sound reasoning other than you are paying too much in taxes with the M2M election in place. (assuming you had made the two separate required elections to begin with).

    Further to be truly safe, I'd think you might consider requesting revocation of the trader in securities M2M election and then when you start trading in the future, either elect before April 15th, or form a separate taxpayer/entity to trade through.
  5. not understanding the question. when you elected mtm did you elect mtm for both stocks and commodities? if so why? when i did mtm it was stated for securities only and not for commodities. with the favorable tax situation for commodities why do it for them . i use greentrader the top trader tax guy in the country and when electing years ago they told em tough to undue. i'll enver undue as i can segregate all my accounts and have long term accounts just like before with fvorable cap gains for thos elong term investments
  6. We originally elected mtm for stocks only, but after the 1st quarter in 02 I had a six-figure gain trading stocks and a similar amount in losses trading index and currency futures. My accountant figured that I should just elect mtm for 1256 as well that year to reduce the tax liability on the stock gains, since by that time I'd figured I'd had enough "experimenting" with futures. But by now I've gone the other direction and only trade 1256 contracts.
  7. i really think you'll hve a battle revoking it. in order to revoke i truely believ you must be out of the trading bus for good and even then its tough.the irs will look at your gig as you got the benefit from it when you elected now its not good for your sitution so get rid of it.your accountants decesion was short term nd now you have to pay for that. i'd be shocked if they revoke it as you're still a trader
  8. Simba


    This discussion just shows how ridiculously complicated our tax system is.
    How about doing away with it altogether, and implementing a flat income tax (10% perhaps?) and / or a consumption-based tax (e.g. VAT).
  9. You are lucky that you had good and TIMELY advice back then. Otherwise you were facing a financial disaster! Far too many people have not been so lucky as you were to have the right advice at the right time in this area. My consultations in recent years with litigators and taxpayers in many "too little too late" M2M elections cases bears this out.

    Given the situation as you've more completely described it, perhaps you should consider forming a separate trading entity/taxpayer and do your Sec 1256 trading thru that entity. The taxpayer who elected Sec 475(f)(2) M2M treatment is only yourself. A newly formed entity (say an s-corporation as an example) would not be allowed to have Sec 475(f)(2) M2M treatment just because its owner had it. Rather the s-corp would be required to file its own election. ...and obviously the s-corp would NOT be doing that, so in effect you'd have your "revoked" election! As a side benefit you'd also have all the other benefits that a separate trading entity offers.

    If you should lose money after revoking the Sec 475(f)(2) M2M treatment election be aware that any carryback can only be used against Sec 1256 gains that ALSO were reported without the Sec 475(f)(2) M2M treatment. Therefore a mid-year entity formation right now might be your safest bet, giving you most flexibility, rather than wait until the start of a new tax year.