Technology has made made sophisticated stock trading tools that exchange floor pros once could only dream of available to every home. It has democratized the ability to make, and lose, money playing the markets.
It can be tempting to chuck the desk job and run off with Maria Bartiromo and TD Ameritrade. Sadly, more than one trader has emerged from the relationship with nothing to show for it but a lifetime of capital loss carryforwards.
That’s where today’s filing season tip comes in. If you qualify as a “trader,” April 15 is your deadline for choosing whether to make the “mark-to-market election” on your trading positions for 2015. If you don’t qualify as a trader, you can’t make the election.
If you make the mark-to-market election, you are required to recognize all of your open positions at year-end on your tax return as if you had cashed them out. More importantly, all of your gains and losses are ordinary, rather than capital.
That may seem like an inherently bad idea. Aren’t capital gains taxed at a lower rate? Yes, they are, but only if they are long-term, on assets held for over one year. That’s not the kind of gain day-traders are going for. Short-term gains are taxed at the same rates as ordinary income.
Ordinary losses, on the other hand, are a good thing. Well, on your tax return, anyway, if not in any other way. While individual capital losses are deductible only against capital gains, plus $3,000 per year, ordinary losses are fully deductible, and can even generate loss carrybacks.
That makes the mark-to-market election useful for day traders. They give up capital gain treatment that they can’t use anyway, and if they have a bad year — and many beginners do — they at least get to deduct all of their losses. For example, a famous trial lawyer who left the bar for day trading used the mark-to-market election to deduct $25 million in losses.
It’s already too late to make the election, also known as the “Section 475(f) election, for 2014. But you have until April 15 to make the election for 2015. You make the election either with either an unextended 2014 1040 or with the Form 4868 extension for the 2014 return. You may not make the election on an extended 1040.
The election is made on a statement with the following information:
- That you are making an election under section 475(f);
- The first tax year for which the election is effective; and
- The trade or business for which you are making the election.
So if you are spending your days with CNBC and your trading program, you might want to hedge your tax risks by making a 2015 475(f) election by April 15.
Related: The lure of a Sec. 475 election (Journal of Accountancy)
This is another of our series of 2015 Filing Season Tips — one daily through April 15!
Russ Fox, Bozo Tax Tip #3: Just Don’t File
Tax Court judges can do math too.We talked last week about the need to properly document charitable deductions. The Tax Court talked about it yesterday, disallowing claimed deductions of $37,315 for lack of substantiation — most of it for purported contributions of household goods. From the decision:
Petitioners did not provide to the IRS or the Court a “contemporaneous written acknowledgment” from any of the four charitable organizations. Petitioners produced no acknowledgment of any kind from the Church or Goodwill. And the doorknob hangers left by the truck drivers from Vietnam Veterans and Purple Heart clearly do not satisfy the regulatory requirements. These doorknob hangers are undated; they are not specific to petitioners; they do not describe the property contributed; and they contain none of the other required information.
So if you claim property deductions for gifts of $250 or more, you need to have something from the charity that, even if it doesn’t show the value, shows what you gave. So why not claim you just gave only gifts under $250? From the Tax Court (my emphasis):
Petitioners contend that they did not need to get written acknowledgments because they made all of their contributions in batches worth less than $250. We did not find this testimony credible. Petitioners allegedly donated property worth $13,115 to the Church; this donation occurred in conjunction with a single event, the Church’s annual flea market. Petitioners’ testimony that they intentionally made all other contributions in batches worth less than $250 requires the assumption that they made these donations, with an alleged value of $24,200, on 97 distinct occasions. This assumption is implausible and has no support in the record.
Hey, I drive a Smart car, it takes a lot of trips!
Jana Luttenegger Weiler, Special Tax Deduction for Contributions to Support Families of Slain NY Officers. (Davis Brown Tax Law Blog). A 2014 deduction that you can still fund today.
TaxGrrrl, Taxes From A To Z (2015): Z Is For Zloty. On paying taxes while abroad and you need to use a foreign currency.
Robert Wood, Newest Tax Fraud Threat? Your Payroll Tax. A good reminder of the need to use EFTPS to monitor your payroll tax service, to make sure your company payroll taxes are getting deposited with the government.
Jason Dinesen, Marriage in the Tax Code, Part 6: Community Property Laws
Kay Bell, IRS headquarters hit by brief Washington, D.C., power outage. A reminder that even if you e-file, you don’t want to wait until the very last minute.
William Perez, Requesting Additional Time to File a State Tax Return
Jack Townsend, Tax Shelter Salesman Avoids Fraud Finding for Investment in Tax Shelter. You’ll have to follow the link for the more accurate, but less printable, version of the headline.
David Brunori, Greed, Piracy, and Cowardice (Tax Analsyts Blog):
I have written about 100 articles on tax incentives, all of them critical. I don’t blame the “greedy” corporations. State and local taxes are a relatively small part of the cost of doing business. Corporations are handed opportunities to minimize their tax burdens — legally. And rationally, they take advantage of those opportunities. The biggest factors in deciding where to invest are labor costs and broad access to markets. If we ended all tax incentives tomorrow, there would be virtually no effect on the economy. Corporations would still be investing where they are investing.
It’s politicians responding to the incentives. Those of us who want better tax policy, broad tax bases, and low rates for all don’t show up at the legislator’s golf fund raisers. Those looking for a special deal for their company or their industry have low handicaps for a reason.
TaxProf, The IRS Scandal, Day 700. 700 days, no scandal here, move along.
Bloomberg, An Emotional Audit: IRS Workers Are Miserable and Overwhelmed. A visit to one of the few places where they still offer on-site service. (Via the TaxProf)
History alert. General Lee surrended to General Grant 150 years ago today at Appomatox Court House, Virginia. Fellow tax blogger Peter Reilly is there, and I am insanely jealous. I am contenting myself by re-reading Lee’s Last Retreat, the best book I’ve seen about the last frantic days of the Army of Northern Virginia. It makes you feel like you are there with the crumbling confederate army as it tried to escape after shattering defeats around Richmond. It also punctures a lot of romantic myths around those events.
After tax season, I will be happy to bore you with my thoughts on why Grant is grievously underrated for his Civil War achievements, and why he is also an underappreciated president. Next week.
News from the Profession: CPA Firm Managing Partner Charged in Embezzlement Scheme (Accounting Today):
Patrick H. Oki, managing partner at the Honolulu-based firm was charged Monday with theft in the first degree, money laundering, use of a computer in the commission of a separate crime, and forgery in the second degree, according to the office of Prosecuting Attorney Keith M. Kaneshiro.
Mr. Oki is reported to be both a CPA and a Certified Fraud Examiner. I can only imagine the awkwardness at the next partner meeting.