qualify as day trader and amend the 3 year returns?

Technical topics regarding tax preparation.
#1
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A client said he had huge loss in 2018 again . so he wanted to change his status to a day trader and amend his prior 3 year returns.

He has work from home full-time job, so he is able to trade during the market opening. and he trades almost every day. ( met at least 4 transactions requirement) he has lost about 500K in 2018, and during 2015-2017 about total 300K.

so I think in terms of time spending, transactions volume, he shall be qualified as a day trader to use Sch C to report and all losses from Stock against his W2 income.

But can he amend his 2015-2017 return, somehow I remember one can not amend the return to use day trader status?

Thanks!
 

#2
LW25  
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I'm a bit rusty, but my memory of the rules is as follows:

To be a "trader" (not a "dealer" and not an "investor"), the taxpayer must buy and sell securities for his or her own account, not from or to a "customer". A trader seeks short term profits, and the trading activity must be substantial, frequent, regular, and continuous. Sounds like your client may qualify in this regard.

But, my memory is that both gains AND losses of a trader generally should be reported as capital gains and losses on Schedule D. Exception: If the trader makes the "mark to market" election, both gains and losses are deductible on Schedule C as ordinary income or expense.

Schedule C for a trader generally can be used to deduct business-related expenses -- but not the losses on dispositions. Again, however, the exception is that if the trader makes the "mark to market" election, the disposition losses can be deducted as ordinary losses on Schedule C.

I would check on the rules for the "mark to market" election.

Again, this is not an area that I have dealt with a lot.
 

#3
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LW25, thank you very much

in terms of substantial, frequent, regular, and continuous, he shall be qualified. But he said he quit trading now.

so even as a day trader, capital gains are still reported in Sch D, though related expense can be reported in Sch C - if this a case, can he amend his prior year returns?

"market to market" election I remember it needs to be done in advance.

Thanks again
 

#4
jon  
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Memory may be wrong, but the election has to be made ahead of timeI THINK????
 

#5
Nilodop  
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A trader must make the mark-to-market election by the original due date (not including extensions) of the tax return for the year prior to the year for which the election becomes effective. You can make the election by attaching a statement either to your income tax return if filed without an extension or to a request for an extension of time to file your return.
. IRS Topic 429
 

#6
LW25  
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More "wrinkles" on this subject.

For a trader, the general rule on a commission paid upon the purchase of a security is that the commission is not deductible. Instead, the commission amount is added to the trader's basis in the security. If a commission is paid by the trader at the time he/she sells the security, the commission is treated as a reduction of the sale price.

I'm not sure, but I think these "commission" rules apply even if the trader makes the "mark to mark" election.
 

#7
Joan TB  
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...he has lost about 500K in 2018, and during 2015-2017 about total 300K.


I think he needs to quit day-trading!
 

#8
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yes, he said he would quit.
 

#9
lucyko  
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Let's see, a cumulative capital gains loss of 800 K,assuming no tax planning at $3,000 per year, will take 267 years to use . A prime candidate for "loss harvesting'"
 

#10
makbo  
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Didn't the markets in general have large gains throughout most of the period being discussed? Must have taken special skill to lose so much. (Fancying oneself a "day trader" is a special skill, I guess).
 

#11
Derby  
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I was just looking into this for a client last week.

Unfortunately. The 475(f) mark-to-market election is required to be filed with the timely return (or timely extension request) for the prior year return. So the earliest he could elect mark-to-market is for the tax year 2020. For 2020, the election deadline is April 15, 2020 with his return or extension request.

If he was unaware of the election until now, taxpayer may be able to elect for 2019 by requesting and paying for a private letter ruling under 9100-3, however this is not automatic and can be denied by the IRS. Not sure if 9100-3 relief would work for prior years. His practitioner probably didn't tell him about the election until now (one of the qualifications for relief), but he would save a lot of tax based on hindsight (which would probably prevent relief from being granted).

Without the mark-to-market election, he may still be a Sec. 162 trade or business. This would allow you to avoid NIIT (since, as a day trader, his business activity is nonpassive), and deduct his margin interest and other expenses on Schedule C rather than Schedule A. Without the 475(f) election, he'd still report trades on Schedule D. HOWEVER, some court decisions have held that the mark-to-market election is one of the indicators of being a trade or business so there's a risk of going for those deductions.

The guidelines for being a Trade or Business of securities trading [url="https://www.irs.gov/taxtopics/tc429"]include[/url]: regular and continuous (more than a year); attempting to profit by market movements rather than investment or dividends (short-term trading); frequency and dollar amounts of trades; time devoted to activity; using the activity as a livelihood. I'm not aware of a 4 transactions/day guideline.

Some courts have held that having a full-time job apart from trading is an indicator that gambling or trading is not a Sec. 162 business, using language like looking for the activity to be taxpayers "sole or primary income". However it seems that those cases, the taxpayer also wasn't really trading super regularly. So a regular, substantial trader with another job might qualify but there is risk of being disallowed.

At any rate, it seems he is no longer "in the trade or business" and can't take the election next year.
 

#12
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Without the mark-to-market election, he may still be a Sec. 162 trade or business. This would allow you to avoid NIIT (since, as a day trader, his business activity is nonpassive), and deduct his margin interest and other expenses on Schedule C rather than Schedule A.


Even if you qualify as a trade or business of a day trader, you are still subject to NIIT (section 1411(c)(2)(B)). However, this doesn't even really matter when you have massive losses.
 

#13
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Derby, thanks for your such detailed analyses, very appreciated.
 

#14
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Wonder if he could be considered a professional gambler? I'm not very familiar with the criteria the IRS wants to see for that, but it seems that playing the stock market can be similar to playing poker for a living. Ouch on those losses.
 

#15
belle  
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I thought that the gains/losses if a Mark to Market election was made flowed to the F 4797 as ordinary income. But, my research is at the office, and I am not.
 

#16
Derby  
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SALYstrikesagain wrote:
Even if you qualify as a trade or business of a day trader, you are still subject to NIIT (section 1411(c)(2)(B)).


Thanks SALY, I got that wrong. Looks like in this case, the benefit for prior year amending is the business expense deductions.
 


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