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Here is a free excerpt of our new Edition 6.
TRADER TAX RULES & TAX RETURN REPORTING GUIDE - EDITION 6
You can order the entire tax guide Edition 6 for same day email delivery by credit card from our Web site at greencompany.com If you ordered and paid for a prior edition, this edition can be purchased for $10. In that case, email us your order to rgreen@greencompany.com
For all customers who purchase Edition 6 before August 15, 1998, we offer you a free 10 minute email or phone consultation. We can help you interpret and apply the rules to your individual tax situation. We can also help you decide whether to elect mark-to-market accounting.
Revised summary of Edition 6 - The IRS Restructuring and Reform Act of 1998 (including Technical Corrections and Revenue Raisers) passed on June 23, 1998 clarifies and reinforces some important new rules for Traders in Securities passed in the '97 Tax Act.
ú Traders in Securities who elect mark-to-market accounting receive the following tax treatment. All post '97 Act enactment date (Aug 5, 1997) realized gains/losses and year-end unrealized mark-to-market gains/losses are treated as ordinary gain or loss and not capital gain or loss. See the full tax guide for how to report these amounts on your tax return.
ú As stated in the IRS Restructuring and Reform Act of 1998, "effective for tax years ending after Aug. 5, 1997, the '97 Act allows securities and commodities traders to elect the mark-to-market accounting rules. Gain or loss recognized by an electing taxpayer is treated as ordinary gain or loss. Gain or loss from the sale or exchange of a capital asset is excluded from net earnings from self-employment for self-employment tax purposes."
ú Four-year spread for Code Sec. 481 adjustments - In the year of change of your accounting method to mark-to-market, the net amount of the adjustments required to be taken into account by the taxpayer under Code Sec 481 as a result of the change in accounting method, is taken into account ratably over the four year period beginning with the first tax year. One area to be further reviewed is what amount is caused by the change. Unrealized gains or losses are certainly part of the change of accounting method, but realized gains and losses may or may not be considered part of the change.
ú Here are some examples. A Trader in Securities elected mark-to-market accounting on August 5, 1997. Trader had realized losses of $13,000 pre-August 5, 1997 and realized losses of $12,000 post-August 5th through the year-end 1997. Trader also had unrealized losses of $8,000 as of year-end 1997. Trader reports the pre-Aug 5th realized losses of $13,000 on Schedule D and is limited to a $3,000 net capital loss in 1997 (with a carryforward of $10,000 of capital losses to 1998). Trader totals the post Aug 5th realized losses together with the unrealized losses and divides that total loss of $20,000 ratably over 4 years. Trader reports a net ordinary loss of $5,000 on Schedule C in 1997, 1998, 1999, and 2000.
ú The net effect of this example is that Trader has $10,000 of pre-Aug 5th losses carryedforward as capital losses (which can only be applied to future capital gains) and $15,000 of ordinary losses reported ratably over the future 3 tax years. If a Trader realized more capital gains in 1998 than were carryforward or unrealized from 1997, that Trader may have been better of not electing mark-to-market accounting. If a Trader is not sure to make back old losses, that Trader is better off with mark-to-market ordinary losses to eventually be applied against all types of future ordinary income over the next 3 tax years.
ú Traders in Securities who elect mark-to-market accounting must continue to use that method for all subsequent tax years, unless revoked with the consent of the Secretary (IRS). A Trader who elected mark-to-market accounting in 1997 reports all 1998 activity in 1998, without the 4 year reporting (only for first year). That Trader could have large unrealized gains at year-end 1998 and they must report the entire amount on Schedule C. Few Traders keep large open positions at year-end.
ú In our opinion, a Trader in Securities is better off electing mark-to-market accounting. You don't lose anything versus a non-electing Trader or Investor. You can segregate long-term investments to get the lower capital gains rate of securities held over 12. You are not liable for self-employment taxes. You are sure to be able to deduct trading losses as ordinary losses rather than have the possibility of never being able to deduct your carryforward capital losses in full.
ú Some part-time Traders in Securities have suffered large losses and then exit the business and remain as Investors. If they had elected mark-to-market, they can then deduct their entire trading losses as ordinary (except any older capital loss carryforwards). They even maybe able to accelerate the deferred ordinary losses over 4 years in the year of exiting the business (see Sec 481 above).
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