A small wrinkle is that their is a small disallowed loss (wash sale) of about $2,000 for 2020. On top of that there's a capital loss carryforward from 2020 to 2021 of about $2,500 (so total of $4,500 in losses going to 2021).
So my question is, mechanically, how does this work? Any pitfalls or common mistakes I should be aware of?
Here is the statement I've drafted to attach to the 2020 return (filing in 2021):
Mark to Market Election Pursuant to Internal Revenue Code Section 475(f)(1) and IRS Rev. Proc. 99-17.
1) [Company Name] (“Taxpayer”) is making a mark to market election under IRC Sect. 475(f)(1).
2) The election shall be effective for the 2021 tax year (January 1, 2021 – December 31, 2021) and all subsequent tax years, unless revoked with the consent of the Secretary.
3) The election is effective for Taxpayer, a trader in securities, except to the extent of any exceptions pursuant to IRC Sect. 475(f)(1)(B).
In connection with this election, Taxpayer is requesting a Change in Accounting Method and will include IRS Form 3115 with its 2021 tax return in accordance with IRC Sect. 475 and the regulations thereunder.
Then, my understanding is that I'd file Form 3115 with the 2021 tax return (filing in 2022). And I'd take the full amount of the wash sale disallowed loss as a 481(a) adjustment (showing as a negative) for tax year 2021, and marking the $50k de minimis election box to take it all in 2021.
Last question is what happens to the capital loss carryover? Is that also treated as a 481(a) adjustment? Or does it retain its character going forward? If the election was in place for 2020, it would have been an ordinary loss. No NOL complications.