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Strategies & Market Trends : IRS, Tax related strategies--Traders -- Ignore unavailable to you. Want to Upgrade?

To: topwright who wrote (389)	6/28/1998 7:49:00 PM
From: Colin Cody	Read Replies (3) \| Respond to of 1383

Raleigh, In 1997 the Congress passed a little known and overlooked modification to IRC Sec 475. This allows an OPTIONAL ELECTION made by the taxpayer, who is a TRADER (as opposed to an INVESTOR or a DEALER), and puts him somewhat on par with the tax ramifications of a SECURITIES DEALER. . Sec 475 covers DEALERS using "mark-to-market" to value their year-end inventory/carryover positions from December 31st to January 1st each year. NOW the Bona-fude TRADER may make virtually the same election. . The election is "pretty much" a one way street. Once made, it STAYS THAT WAY (generally). For a day trader who never holds positions open for longer than 12 months (always short-term), and who always shows an annual profit, the mark-to-market may offer little, EXCEPT perhaps some ease in his bookkeeping at year-end time. . If the Trader has open positions at a LOSS on Dec 31, the mark-to-market would RECOGNIZE THEM!!! This might save/defer taxes ONE year, but of course the following year you'd in effect, give the tax break back. Conversely, if he had open positions at a GAIN, Mark-to-market would TAX THEM a year earlier. . If a Trader did poorly, and overall he lost in excess of the normal $3,000 annual loss limit, the mark-to-market rule would allow him to recognize all his trading losses that year, no $3,000 limitation. . The law is UNCLEAR on exactly HOW these mark-to-market adjustments are taxed. I expect that Congress has something about it (to clear it up) in the bill passed last week. . Also the above discussion assumes we are in the future and that you already made the election several years before. There are complicated first year and early year transition rules that also need to be followed. i.e. you can't wait until you lose $100,000 and then prance in and expect to make the election and deduct your $100,000. Generally, you need to make the election long before you "need" it. . Colin