ASSOCIATION
TRADER TAX BENEFITS: TAX LAW CHANGES

GTT "virtual lobbying campaign" for "Trader Tax Relief & Corrections"

Desired tax law changes

Summary of major desired tax law changes (August 2009):

"Retroactive" application of the mark-to-market accounting rules: This would allow all traders who lost a fortune since 1999 to receive immediate tax refunds by filing net operating loss (NOL) tax returns. Currently, only traders who elect mark-to-market accounting on time are entitled to these NOL refunds. The election rules are complex and unpublicized, and the transition rules are not fair. We want to fix this for the benefit of all traders.

Help formulate new "exam guidelines" to be used in IRS exams of traders, which are occurring in increasing numbers: Recently, the IRS dramatically increased its target number of IRS exams in general, and specifically against traders. We have noticed that the IRS is now attacking "money-losing traders" and "part-time traders." Click on the prior links to learn more.

Improve the definition of a trader in IRS publications, Revenue Procedures and on the IRS Web site: The current definition of a trader is vague and confusing. All the trader tax status benefits hinge on this definition, which is lacking. The definition is primarily defined in old tax-court cases, which are mostly obsolete now because those opinions were written long before the entire trading industry changed. It is now much easier for a trader to operate a trading business because of the creation of home computers, the Internet, direct-access brokerages, etc.

See details below:

1. IRC Section 475(f) & Rev. Proc. 99-17 – the mark-to-market (MTM) accounting election tax laws. Retroactively extend the transition rule from 1998 until 2001: Currently, a trader may only use MTM if he or she elected MTM by April 15 of the current tax year; for example, by April 15, 2001 for 2001. We want the following "retroactive change" to Rev Proc's 99-17 and 2002-9:

The current Rev Proc 99-17 "transition rules" state that starting with tax year 1999, the regular MTM election rules take effect: an individual must elect MTM for the current tax year by April 15. For example, if you wanted to elect MTM for 1999, you had to elect MTM by April 15, 1999. The "transition rule" applies to years prior to 1999 only. For example, for 1998, a trader could elect MTM on their 1998 tax return filed by the due date, including extensions, of Oct. 15, 1999. If a trader missed the 1999 MTM election by April 15, 1999, he or she might have elected MTM for 1998 by Oct. 15, 1999, and that 1998 MTM status then carried over automatically to 1999. The trader also had to file their Form 3115 (Change of Accounting Method) with their 1998 tax return.

The simple "retroactive change" we desire is as follows: Retroactively extend the transition rule in Rev Proc 99-17 to change the transition period to include years up to 2001 – in other words, the post-transition and new MTM election rules commence with 2002 rather than tax year 1999. If you missed the 2002 MTM election on April 15, 2002, you can elect MTM with the filing of your 2001 tax return or amended return by Oct. 15, 2002.

If you filed a cash-method tax return for all or any of the years 1999, 2000 or 2001, you may amend those returns until Oct. 15, 2002. You are allowed three years to amend a tax return from date of filing (due date) or two years after filing if filed late.

2. "Wash-sale” loss deferral rules should be exempt for all traders, not just MTM traders: For MTM traders, wash-sale losses are irrelevant, since traders report unrealized gains and losses on open positions. We seek a change to exempt cash-basis traders (traders who chose not to elect MTM) from the wash-sale rules. Traders don't receive long-term capital gains tax-rate benefits on trading positions, so why should they be penalized with the onerous wash-sale rules that are an accounting nightmare for very active traders? Wash sales are unavoidable for active traders, who often specialize in trading certain securities (the same ones over and over), and wash-sale rules make no sense for traders.

3. Traders can designate a portion of their trading gains as "earned income" for purposes of retirement plan contributions, health-insurance deductions and the payment of self-employment tax: Currently, trading gains are not considered "earned income," and if a "sole proprietor" trader wants to deduct health-insurance premiums and/or pay into a tax-deductible or non-tax-deductible retirement plan, the trader must form an entity and then pay him or herself a fee or salary. We seek relief and convenience in being able to simply designate an "earned income" portion or full part of a trader's net trading gains after trading expenses. Currently, only a "trader in commodities" with a seat on an exchange is deemed to have earned income from trading gains, and may have all of the above. In effect, we seek to extend this law to other traders on an elective basis each tax year.

4. Help formulate new "exam guidelines" to be used in the growing number of IRS exams for traders: Recently, the IRS dramatically increased its target number of IRS exams in general and specifically against traders. We have noticed that the IRS is now attacking "money-losing traders" and "part-time traders." Click on the prior links to learn more. We plan to join the below IRS program to take a proactive role.

The IRS invites tax professionals and industry groups to get involved in "engineering" the exam process for their particular industry.
"SB/SE Exam Reengineering Project: IRS Teams Seek Input From Small Businesses, Tax Practitioners to Improve Audit Process."

5. Improve the definition of a trader in IRS publications, Revenue Procedures and on the IRS Web site: The current definition of a trader is vague and confusing. All the trader tax status benefits hinge on this definition, which is lacking. The definition is primarily defined in old tax-court cases, which are mostly obsolete now because those opinions were written long before the entire trading industry changed. It is now much easier for a trader to operate a trading business because of the creation of home computers, the Internet, direct-access brokerages, etc.

Not having a clear definition of trader tax status has scared many otherwise qualified traders away from using trader tax status benefits. It has also invited some traders who don't qualify to think they qualify and use trader tax status benefits. Later, these traders learn they owe the IRS penalties and interest after the IRS successfully denied them use of trader tax status.

Traders absolutely deserve a clear, objective definition they can build upon for tax-planning purposes.