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quereau
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year end strategy for MTM new
      #46 - 11/02/03 01:49 PM
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I elected MTM for this year for the first time. I have been treating my investment account (that includes several investments and about 80 day/swing trades per year) as non MTM and plan on using MTM for my prop. trading activities only. Right now I have gains in the long term investments, personal day trades, and prop. trading...all of which greatly exceed carry forward losses. I understand that on MTM tax loss selling is not necessary. I am confused about whether to tax loss sell a few positions in my personal account to offset long term gains that will not be treated as MTM. I have about 20K in losses (on stocks held less than 1 year in my personal account) I could take and don't know whether to do it or not. Please advise. Thanks.

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GreenGTTCPAAdministrator
CPA & CEO
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Re: year end strategy for MTM
      #47 - 11/02/03 02:44 PM
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If you have trader tax status (business treatment) and timely elected MTM on securities by 4/15/03, you are required to use MTM on your “trading positions” for 2003. You may not use MTM on your “segregated investment positions.”

If you mix trading and investment positions together in an account and clearly some positions act like trading positions and not investments, the IRS may argue that MTM should be applied to those trading positions. This may be the case for your 80 day/swing trades per year.

80 day/swing trades per year are not enough to qualify for trader tax status and then MTM could not be applied anyway.

However, the IRS may view your prop trading business activity together with your other trading activity, which means the IRS may want you to use MTM on the 80 day/swing trades per year.

Most prop trading firms are broker/dealers and use MTM by default. A few of them don’t use MTM. Find out which accounting method your firm uses. If you receive a K-1 as an LLC member in a prop trading firm that uses MTM, your trading gains and losses are included on line 1, along with business expenses.

When you are an LLC member, your election for MTM has no effect on your K-1, since the MTM election or default status is handled on the prop trading firm entity-level.

Your case is nuanced and the IRS can go either way, therefore if you want a tax loss before year end, don’t count on MTM and instead sell the position to be sure of the loss for 2003.

Consider our firm for preparing your return. We can take a much better look and give you the best advice at tax time (and for more year end planning).

Read our article on Year End Tax Planning here. http://www.greencompany.com/EducationCenter/GTTRecStratYearEndPlanning.shtml

--------------------
Robert A. Green, CPA & CEO
GreenTraderTax.com

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Jared
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Reged: 11/02/03
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Re: year end strategy for MTM new
      #48 - 11/02/03 03:51 PM
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Thanks very much for the response. I am a client of your's already...Buddy prepared my return last year. The prop firm I work for became a B/D this year and I was informed that I will receive a K-1 for the second part of the year. I am attempting to understand all these technicalities myself since I have past experience with the cost of even a small mistake in not taking a loss by year end...and I refuse to let it happen again. It seems difficult enough to become a consistently profitable trader, so I feel like the last thing I need working against me is careless tax strategy.

Follow up question: If for instance my 80 day/swing trades became many more day/swing trades, I may lose the ability to segregate and have to mark all positions to market?

Also, typically if I have a large gain in a stock during a year of already realized gains I would like to hold for the long term gain (if I have held close to 12 months.) But under MTM I could sell the position because it COULD be marked to market at year end anyway if I call it a trade and not an investment?

Jared Quereau

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Jared
stranger

Reged: 11/02/03
Posts: 2
Re: year end strategy for MTM new
      #49 - 11/02/03 03:57 PM
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Is it true that the switch to K-1 will eliminate the self-employment tax for me?

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GreenGTTCPAAdministrator
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Re: year end strategy for MTM new
      #52 - 11/02/03 05:25 PM
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Glad to have you as a long term client Jared.

Confirm your prop trading firm is using MTM, so you have ordinary gain treatment rather then capital gains treatment on your K-1. Some prop trading firms don’t allocate losses to prop traders on K-1s and instead take losses on the Class A members (owners) K-1s only – find out.

I suggest you give Buddy your prop trading firm agreement to read about your class of ownership and how this is handled. I have not spoken with him tonight about this. Sign up for 2003 early on. Thanks.

If your firm uses MTM, then you don’t need to sell positions before year end for “tax loss selling”, since MTM will include unrealized losses.

Trading gains with or without MTM, through a prop trading firm K-1 or a “customer account” (direct access or online, etc) are exempt from self employment taxation. One exception - if you are a dealer in commodities or registered in any capacity on a commodities exchange, you are subject to self employment taxes.

Don’t worry no matter what your circumstances are as a MTM trader, like any other taxpayer, you are entitled to have investment positions that are not part of your trading business and not subject to MTM. Just make sure to follow the careful rules discussed in an earlier post on “segregation.”

--------------------
Robert A. Green, CPA & CEO
GreenTraderTax.com

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