I was part of a proprietary trading firm in early 2014, I never declared myself as a trader to the IRS or file for section 475 for last year, but as a trader for this firm I was a "partner". I was Series 56 certified, made my deposits and traded on behalf of myself and the firm. I lost a good amount of money and stopped trading halfway through the year. I received my K-1 from them (with the losses and such). Line 11 is reported with my losses and they also sent additional statement with a line reading Form 4797 Part II Gain (loss) and my loss amount beside it. My question is this. I read that for me to declare my losses as a business loss vs. capital gains loss, I would have had to declare as a trader last year. Being that the trading firm sent me the K-1 indicating my losses and also indicating line Form 4797 Part II and "Line 11F is a Mark-to-Market Trading Income-I.R.C. Sec. 475 (F), have they already done it for me? Or because I was a partner of the LLC, that I didn't have to because I will be claiming the losses as a partner vs. being an individual trader? Am I OK to file the 4797 and my losses as business losses? Thank you in advance.
As a partner of a proprietary trading firm receiving a Schedule K-1 for your share of partnership income, loss and expense, you report the items as stated. The prop trading firm qualifies for trader tax status and it elected Section 475 MTM at the firm level. You are not a retail trader requiring TTS and Section 475 on the individual level.
Thanks Rob, I was a class C member. I should only be responsible for what I deposited correct? From my understanding of what you are saying, I am able to deduct my losses as business losses vs. just capital gains losses?
You need to have cost basis in the partnership to deduct partnership losses allocated to you so see your capital account reported on the K-1. Deposits are not cost basis and those write offs are handled differently. Yes, Section 475 losses on Form 4797 Part II are ordinary business losses.
Rob, I went ahead and purchased your book. I got some more clarity, however how would I know if the trading firm took my losses at the firm-owner level vs. passed along to me?
Seems like from my understanding the losses have been passed along to me. Do I need to have each individual trade logged into the 4797 or is that the firm's responsibility?
Will, I'm not a tax expert like Robert. However, I do know that at the prop firm, those trades don't belong to you, they belong to the firm. You get a K1 to represent your distribution of P & L. There is no reason to list trades as they are not your trades. You only report the information on the K1. After that, I'm not sure what you can do with the losses.
Correct, look to the Schedule K-1 for reporting guidance. It will show your opening capital account, income or loss for the year, distributions and ending capital account. Sounds like the firm treated your deposit as a contribution to your capital account rather than as a deposit treated as a firm liability. Correct, you have summary reporting of items on the K-1, you don't have retail trades to report like securities trades line by line.
In some firms, Class A members are allocated all losses and Class C prop traders are allocated income based on new high net profits when generated.