As we navigate the recent volatility in the stock market, you may want to think about the possible favorable federal income tax treatment the tax code gives to a securities trader.
Suppose you can qualify as a securities trader for federal income tax purposes. In that case, you deduct your trading-related expenses on Schedule C of Form 1040 and make the taxpayer-friendly mark-to-market election, which is not available to garden-variety investors.
The mark-to-market election has two important federal income tax advantages:
1. Exemption from the capital loss deduction limitation
2. Exemption from the wash sale rule
But there is a price to pay for these tax advantages. First, as a trader who has made the mark-to-market election, you must pretend to sell your entire trading portfolio at market on the last trading day of the year, which may have little or no tax impact if you have little or nothing in your trading portfolio at year-end.
Second, your trading activities must constitute a business for you to qualify as a securities trader, and you must meet both of the following requirements:
1. Your trading must be frequent and substantial.
2. You must seek to profit from short-term market swings rather than longer-term strategies.
If you are a calendar-year taxpayer, the deadline to make the mark-to-market election is the day on which individual income tax returns are due to be submitted to the federal government (i.e. the deadline for your 2024 tax year is April 15, 2024). You make the election by including a statement with your Form 1040 filed by that date or with a Form 4868 extension request for your tax return filed by that date.
We specialize in helping clients clarify their taxes so they keep more of their money. Many investors who come to see us in Fort Worth, TX generally do not understand the tax law enough to explain it to a fifth grader.