This is a series about the 5 Most Expensive Tax Mistakes That Traders Make. Many people do not think of stock investing and stock trading as a business. But if you make a decent income from stocks, options, futures, forex, bonds, or commodities, consider the extra benefits setting up a small trading business would provide.
Mistake #5. Mark to Market Accounting Election
One of the many benefits of filing as a trader in securities is being able to elect Section 475(f) mark to market accounting. This method enables a trader to convert capital gains and losses into ordinary gains and losses. By converting capital losses into ordinary losses, a trader can take up to 100% of their trading losses off of any other income source on their tax return. By comparison, you can only take a maximum of $3000 capital loss off of your tax return.
With mark to market accounting, a trader is also not subject to the wash sale rules. I cannot tell you how many times I’ve seen a trader who actually lost money trading for the year but had to pay capital gains tax due to the wash sale rules!
The mistake traders make is delaying making this election. Many beginning traders struggle to make money and as a result, end up with a lot of capital losses. If these traders had made the mark to market election, they would have been able to carry these losses back up to 2 years and use them against ANY other income source, even their spouse’s!
Now the trader is in a “Catch 22” situation. If they elect mark to market and make money, they’ll have to pay income tax on the gains, as they cannot use their accumulated capital losses to offset them. If they don’t elect mark to market and continue to lose money, they are making a bad situation even worse.
The solution: determine if mark to market is right for your trading business and make that election as soon as you can. Trader Tax Coach can help you with that decision and make sure your election is done correctly.
Part 1. The Wrong Business Structure.
Part 2. Why Are You Not Hiring Your Kids?.
Part 3. Missing Health Care Strategies.
Part 4. Wrong Home Office Deduction.
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