4

I have traded for most of the year while I work at my full time job as a software developer. I am using it to augment my income. I like working in academia but it just doesn't pay that well! I started in late January and made trades in every month of the year. The median holding time per position was about 3 days (so I was trying to capitalize on short time price swings).

I'm new at trading, so I made some emotional mistakes and if my calculations are right I lost about $5000 I gained about $1400 by the end of 2013. I calculated this by doing the mark to market on 12/31 and subtracting the account balance (~69,200) (~75,900) as of that day from the total amount of cash I've put in (~74,500) as of that day. The numbers above are corrected; I had forgotten to mark my SPY position to market. So my actual gain was ~$1400, but according to my Scottrade tax report, due to the wash sale rules, it looks like I gained $20k! This is punitive.

The only way out that I can see is the mark to market election, but I'm wary of it. I'm not certain I qualify, and I'm not certain I want to KEEP trading every year from now on (I might want to transition to a more traditional investing pattern if there is a big correction in the market). But I am certain I don't want to pay a few thousand dollars of tax on some imaginary gains! :( Does anybody know specifics about how hard it is to get permission from the IRS to come back from the M2M election? And are there any red flags in this scenario which would mean I'm not even eligible for it?

Category                Gross Proceeds Cost Basis     Wash Sale Loss Disallowed  Net Gain/Loss
A (basis reported)      $1,698,367.79  $1,854,734.46  $168,059.55                $11,692.88   
B (basis not reported)  $3,104,256.07  $3,534,153.57  $438,278.99                $8,381.49    
Total                   $4,802,623.86  $5,388,888.03  $606,338.54                $20,074.37
Matt Chambers
  • 433
  • 5
  • 15

2 Answers2

4

Here are the details. Whether it is hard to get the permission to revoke the election is hard to tell, since no-one can tell the future. Form 3115 is filed routinely by tax professionals to request changes in accounting methods. It may trigger an audit if you only use it for one year and have substantial losses that would not otherwise be allowed. If you qualify for the trader terms - then you just show it during the audit.

I would suggest getting a professional help you here. The main pitfall I see is the requirement for the activity to be substantial. $5K profit and $70K overall balance doesn't strike me as substantial for a software engineer (i.e.: I expect your overall income is significantly more than those $5K). But I'm not a tax professional and definitely not an IRS revenue agent, so what the heck do I know...

littleadv
  • 190,863
  • 15
  • 314
  • 526
3

If you did not elect mark to market by April 15, 2013, then you cannot claim mark to market for tax year 2013. You were not timely, so the issue is moot for the tax year at issue. See Pub 550 (p 70) or Topic 429. Sorry to bear bad news.

Note that your wash sale losses are only suspended until you exit the stock, so this is not a straight loss. See IRC ยง 1091(d). They should be included in your basis of the over-traded stock. This is a time value issue, so you lost the value of those losses for 2013 but they still exist, suspended in basis, for 2014 and beyond.

It will preserve your flexibility to avoid mark to market and be a regular investor. You can time your income. The most commonly cited reason to avoid mark to market is of course the phantom income problem - you must sell an investment to find the cash to pay the tax on that investment. That may make sense if you are liquid and seldom hold stocks or investments for long periods. But phantom income is not a fun problem to have and you may find it less convenient than dodging wash sale rules.

NL7
  • 4,819
  • 17
  • 20