EDUCATION CENTER
GTT RESOURCES: MTM: MISSED MTM
You missed the mark-to-market (MTM) accounting election by April 15th of the current tax year. What can you do now?
As explained on our MTM Web page, the election
process is in two parts. First the election must be duly filed on time
(per above dates) and second the taxpayer must file a Form 3115 (Change
of Accounting Method) with their tax return for the year of change.
For example, for a 2005 MTM election, the election statement must be filed
by 4/15/05 and the 2005 Form 3115 filed with the 2005 tax return, including
extensions in 2006. That means the 2005 tax return Form 3115 can be filed
by 10/15/06, if on 2nd extension.
Lots of traders missed the mark-to-market (MTM) election for IRC 475(f) by the due date of April 15 for the current tax year. Without MTM, a trader is stuck with "capital loss" treatment and can not deduct their trading losses as "ordinary losses." This significantly reduces the traders opportunity for net operating loss refunds.
We may be able to still help you. Read below and see which special situation and GTT solution may apply to you.
Wash
sales can improve your tax results.
You
can next elect MTM for the following tax year by April 15th.
It's
after October 15th (the 6-month extension date), what options are left?
One
option is forming a new trader entity to elect MTM internally within
75-days of inception..
GTT's
advocacy campaign is trying to get the law changed, but with little
success to date.
Important Note. If you do not exactly follow the MTM
election rules (election statement, Form 3115 filing and MTM application
correctly on your tax return), the IRS will prevail (in Tax Court if necessary)
in denying you ordinary loss treatment. It's a technical aspect of the
law and there is no judgment involved. The opposite applies for trader
tax status - there is lot's to debate on that status. So don't try to
win with MTM if you don't have a perfect MTM filing positions - you will
lose on that point alone.
If you have any questions about this subject, e-mail info@greencompany.com
or call us.
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Ready for a consultation with a GTT CPA |
You missed the MTM election for the current tax year and are stuck with the cash method of accounting.
Unless you are a "new taxpayer," if you did not file a MTM election with the IRS by 4/15/05 (for individuals and 3/15/05 for calendar year corporations), and you did not successfully file a "private letter ruling" by 10/15/05, seeking a 6-month extension for MTM, then you have no chance to claim and use MTM status for 2005. If you had MTM in the prior tax year, no new election is required, so you are okay here. .
For information on the 6-month extension for MTM elections, click here. For information about filing a private letter ruling to seek a 6-month extension for MTM elections, click here.
You may have missed the MTM election, but you can still reap many trader tax status benefits:
The first key to unlocking tax benefits for traders (on 2005 income tax
returns), is to see if you qualify as being in the business of trading
(otherwise known as “trader tax status”). In early 2006, you
may look back at your 2005 trading activity and determine if it rose to
the level of a “business activity” (as opposed to the default
“investment activity”).
“Business activity” means a trader should file a “sole
proprietor” tax return; which is a Schedule C (Profit and Loss from
Business); part of an individual’s Form 1040 income tax return. A
sole proprietor trader reports their trading business expenses (including
margin interest, home office expenses, depreciation and all other type
of business expenses) on Schedule C; which are “ordinary deductions”
in generating gross income (“above the line” deductions).
Watch out! You may consider yourself a business trader, but the IRS may
not. At www.irs.gov,
read IRS Publication 550, Chapter 4 “Special Rules for Traders”
and make sure you pass their definition. It may not be easy, because the
IRS rules are general and not objective. If you have less then 1,000 round
turn trades, you should read our below guide and consider a consultation.
Learn more about trader tax status and MTM in Robert Green's book "The
Tax Guide for Traders." Click
here.
If your trading activity falls short of the business definition, you
must file a normal investor tax return. The tax consequence of this is
lower tax savings because your trading expenses are “investment expenses”,
subject to limitations and usefulness. Investment expenses are reported
on Schedule A (itemized deductions). Among the limitations are the 2%
of AGI miscellaneous deduction floor, the itemized deduction limitation,
non-deductibility for the onerous Alternative Minimum Tax, investment
income limitations for investment interest expenses and many trader expenses
are not deductible at all (like home office expenses and seminars).
To dramatize the tax benefits in filing as a sole proprietor trader, we
include three example trader tax returns in our below guide. Each example
tax return has the same income and expenses for the same composite trader
taxpayer. So for comparison purposes, it’s apples and apples and
not apples and oranges.
Wash sales can improve
your tax results:
If you are stuck with excess capital loss carryovers for 2005, consider
that wash
sale losses may be better tax-wise then capital loss carryovers. 2005
wash sale losses can be converted to 2006 "ordinary losses",
if you elect MTM, whereas capital loss carryovers may remain unutilized
capital loss carryovers in 2005. Green covered this topic in full in his
Year End Tax Planning articles for Active
Trader and SFO magazines. Click
here to learn more.
The best way to calculate your wash sale losses is with our GTT TradeLog
or TradeLog trade accounting software programs. Click
here to learn
about the programs and buy them online.
You can next elect MTM for 2005
by 4/15/05:
Try very hard not to miss the 4/15/05 deadline for filing 2005 MTM elections.
We recommend that you purchase our book and/or guides to learn all about MTM, how to elect it, and many special GTT tax strategies in electing MTM. Click here.
You missed the 2005 MTM
election on 4/15/05 and file a 6-month extension by 10/15/05.
Extensions available for late MTM elections:
If you missed the MTM election deadline for 2005, by April 15, 2005, you may be able to obtain a 6-month extension of time to file. If you act by 10/15/05, you may be able to receive an extension of time to file your 2004 MTM election. Reg § 301.9100-1 "Extensions of time to make elections" provides relief for late elections. Note the maximum extension period is 6-months. The MTM election due date was April 15, 2004, so the extended due date is 10/15/05. The procedure to use to request this extension is the private letter ruling (PLR) process below. There is very low likelihood that a PLR will work.
For information on the 6-month extension for MTM elections, click
here.
There is some new guidance from the IRS on "9100 relief." Click
here to see this information from RIA.
Private Letter Rulings: How you file an extension for late MTM elections
The PLR procedure is painstaking and expensive, and for traders seeking
relief to use MTM, the chance of success is extremely small. To date,
the IRS Web site has published only three PLRs for traders seeking to
use MTM, and all three have been denied.
You missed both the 2005 MTM election on 4/15/05 and the 6-month extension by 10/15/05.
After 10/15/05, you can no longer seek relief under Reg § 301.9100-1 for filing a 6-month MTM election extension. The maximum extension period is 6-months (see above).
Other ideas are listed below.
If you missed the MTM election for 2005, consider forming a new trader entity to use MTM.
New entity set up before year end:
You may want to consider forming a simple and inexpensive new trading
entity (such as a single member LLC), and then electing MTM internally
within 75 days of commencement. Note that only the trading activity
in the new entity going forward will be able to use MTM, not your
trading activity on your individual level for the year to date. Click
here to learn more about trader entities.
"New Taxpayers", including new husband/wife partnerships elect internally, not with the IRS.
"New Taxpayers" don't file the MTM election with the IRS. Rather, they elect it "internally" (in their own books and records). New taxpayers for 2005 include individuals that never filed (or was required to file) a tax return before 2005.
New entities can be deemed "new taxpayers", in their first year of operations. A husband and wife may be unofficial "partners" in a trading business (without realizing it) and they may claim they elected MTM internally as a "new taxpayer" (general partnership by 3/15/05 for 2005). Click here to learn more about husband and wife trading partnerships.
GTT advocacy campaign to seek changes in the law on late MTM elections.
Another long shot for relief may be GTT's "Trader & Investor
Tax Relief Advocacy Campaign." We are working hard to get "retroactive"
MTM relief for all traders. We need your help to enact this change.
Click here to learn
more. Please join us.
MTM Election Deadline: Individuals must elect MTM by April 15 of the current tax year. Once you make the election, it carries over automatically to the following tax years, provided you remain in the trading business. This saves you the trouble of having to re-elect MTM each tax year by April 15. How, when and where to file a valid MTM election is covered in full in our trader tax book and guides. The book and guides cover"new taxpayers," entities of all kinds, new traders, existing traders and much more.
Our firm tries its best to educate traders on the benefits of MTM, but unfortunately we don't reach most traders. Our Robert A. Green, CPA writes the "Business of Trading" section for Active Trader magazine, and in many articles he expounds on the virtues of MTM.
Frequently asked questions (FAQs).
I did not start trading until after April 15,
so how could I have known to elect MTM by April 15?
The IRS answer translates to “tough luck.” You still had to
elect MTM by April 15 of the current tax year. If you are a "new
taxpayer" – a person or entity filing his or her first tax return,
you could have elected internally, without an election being filed with
the IRS by April 15. If you want MTM for 2005, see discussion of Reg §
301.9100-1 relief filed by 10/15/05.
I didn't know about MTM and it's not fair because
my broker, accountant and lawyer did not tell me about it. Why should
I be punished by not being allowed to elect it?
Again, the IRS answer translates to “tough luck.” Ignorance
is not a valid excuse for a private letter ruling or other form of relief.
You may have engaged a self-professed trader tax expert or a highly regarded
CPA or other tax professional, but you can not rely on that for success
with a private letter ruling – see more on that below. In some cases,
if you received the wrong advice, it may help your case in a private letter
ruling for the following relief. If you want MTM for 2005, see discussion
of Reg § 301.9100-1 relief filed by 10/15/05.
I elected MTM on time but then decided to not
use it since I did not want to report significant unrealized gains
on trading positions. Is that OK?
No, it's not. If you elect MTM on time and qualify as being in the trading
business, then you must use MTM on your tax return. That is the whole
idea of electing MTM by April 15 – the IRS does not want a taxpayer
to play games with accounting methods. Remember, you don't have to use
MTM for your segregated investment positions.
I read an article that told me I could elect
MTM after April 15 and I relied on that erroneous article. Can I get
relief from the IRS?
Yes, maybe you can get relief to use MTM through the Private Letter Ruling
process. Click here.
If you want MTM for 2005, see discussion of Reg § 301.9100-1 relief
filed by 10/15/05.
I did my best to elect MTM on time using the
rules that I read. Now the IRS tells me I don't have MTM because something
was done wrong. Can I get relief to use MTM?
We suggest you purchase a consultation with our CPAs. We can review
your facts and the IRS reply. We may be able to help you if we feel
you elected on time. Perhaps, we need to amend your tax return for
how MTM was reported and how your Form 3115 was filled out.
Yes, maybe you can get relief to use MTM through the Private Letter Ruling
process. Click here.
If you want MTM for 2005, see discussion of Reg § 301.9100-1 relief
filed by 10/15/05.
I missed the MTM deadline of April 15, 2005. Is
there any way for me to use MTM for the remaining part of 2005?
If you want MTM for 2005, see discussion of Reg § 301.9100-1 relief
filed by 10/15/05. Also, you can form a trading entity and elect MTM internally
within 75 days of inception. You then have MTM on the entity level. If
you have a "pass-through" entity such as a single-member LLC,
partnership or S-Corp, your MTM trading gains and losses will pass through
to your individual tax return. See more about our "single-member
LLC" idea here..
I want to use MTM accounting but I have large carryover
capital losses. How can I use MTM and also use up my capital loss carryovers?
When you convert to MTM, your trading gains and losses are ordinary and
not capital gains and losses. Therefore, your MTM trading gains cannot
be used to offset your capital loss carryovers. You are stuck in a predicament.
We include many strategies in our trader
tax book and guides.
I read on another Web site that specializes
in trader tax status matters that a trader could claim that he or
she was a "dealer," which means they are required to use
MTM without the need to elect MTM on time. Is this true?
We disagree entirely and think you are getting yourself into potential
tax trouble if you try this "dealer with MTM" tax strategy.
To be considered a "dealer" by the IRS, you must have "customers."
In our opinion, it is a real stretch of logic and poor professional judgment
to advise traders that they can qualify as dealers because they trade
exclusively on ECNs. If you visited that other expert’s site and
have questions about this strategy, feel free to e-mail us for more help.
