Off topic but some of you may find this worth considering based on recent market conditions. If you think you will have significant losses should you sell and you "trade" frequently, take a read. This is from an accounting firm specializing in helping traders. Investors probably wouldn't qualify to use this election.
Massive Market Losses? Elect 475 For Enormous Tax Savings
February 29, 2020 | By: Robert A. Green, CPA | Read it on
With heightened market volatility in Q1 2020, many traders incurred massive losses. Those who qualify for trader tax status (TTS) should consider a 2020 Section 475 election to turn capital losses into ordinary losses. Don’t get stuck with a $3,000 capital loss limitation for 2020 and a considerable capital loss carryover to 2021; unlock immediate tax savings with ordinary-loss deductions against wages and other income this year.
Election procedures: Existing TTS partnerships and S-Corps should attach a 475 election statement to their 2019 entity tax return or extension due March 16, 2020. TTS sole proprietors (individuals) should attach a 475 election statement to their 2019 income tax return or extension due April 15, 2020. The second step is to file a 2020 Form 3115 (Application for Change in Accounting Method) with your 2020 tax return. There are other benefits: 475 trades are exempt from dreaded wash sale loss adjustments, and profitable 475/TTS traders are eligible for the 20% QBI deduction if they are under the QBI taxable income thresholds.
Example 1: A TTS securities trader incurred a capital loss of $103,000 in Q1 2020. He elects Section 475 on securities only for 2020 by April 15, 2020, converting the Q1 capital loss into an ordinary loss on Form 4797 Part II. He also plans to deduct $12,000 of trading business expenses on a Schedule C. He intends to offset the entire trading business loss of $115,000 against a wage income of $175,000 for a gross income of $60,000. Without a 475 election, this trader would have a $3,000 capital loss limitation on Schedule D, a $12,000 ordinary loss on Schedule C, and a gross income of $160,000. He would also have a capital loss carryover to 2021 of $100,000. By deducting the entire $100,000 in 2020 with a 475 election, the trader generates a considerable tax refund.
More about 475
Traders eligible for TTS have the option to make a timely election for the Section 475 accounting method on securities and/or commodities. Section 475 is mark-to-market (MTM) accounting with ordinary gain or loss treatment. MTM imputes sales of open positions at the year-end at market prices. Without MTM, securities traders use the realization (cash) method with capital gains and loss treatment, including wash sale loss adjustments and the annual $3,000 capital loss limitation.
Caution: Sole proprietor (individual) TTS traders who missed the Section 475 MTM election date (April 15, 2019, for 2019) can’t use ordinary-loss treatment for 2019 and are stuck with capital gains and losses and perhaps capital-loss carryovers to 2020. Carefully consider a 475 election for 2020, as you need capital gains to use up capital loss carryovers, and 475 is ordinary income.
A new entity set up after April 15, 2020, could deliver Section 475 MTM for the rest of 2020 on trading losses generated in the entity account if it filed an internal Section 475 MTM election within 75 days of inception.
Ordinary losses offset all types of income (wages, portfolio income, and capital gains) on a joint or single filing, whereas capital losses only offset capital gains. Plus, business expenses and ordinary trading losses comprise a net operating loss (NOL) carry forward.
By making a 475 election on securities only, TTS traders retain lower 60/40 capital gains rates on Section 1256 contracts (futures), and they can segregate investment positions for long-term capital gains.
The new tax law TCJA introduced an “excess business loss” (EBL) limitation starting in 2018. For 2019 the inflation-adjusted EBL limitation is $510,000 married and $255,000 other taxpayers. The EBL applies to Section 475 ordinary losses and trading expenses. Add an EBL to an NOL carryforward. For example, a single taxpayer with a $300,000 ordinary loss from 475 and trading costs, and no other wage or business income, might have an EBL of $45,000.
TCJA offers a 20% qualified business income (QBI) tax deduction for pass-through businesses, including sole proprietors. TTS trading is a specified service activity. QBI includes 475 ordinary income; whereas, it excludes capital gains/losses, portfolio income, and forex. TTS expenses are negative QBI. A profitable TTS/475 trader is eligible for the QBI deduction providing their taxable income is not over the QBI thresholds.
Don’t miss the 475 election deadline
Applying for 9100 relief within six months of the 475-election due date by private letter ruling (PLR) is an expensive process, and it’s likely to fail. Only one trader won this type of relief, Mr. Vines displayed no hindsight and good faith, and he had a perfect set of factors. In a recent PLR 202009013, dated November 15, 2019, the IRS ruled, “Taxpayers are not entitled to § 301.9100 relief to make a late § 475(f)(1) election because Taxpayers did not act reasonably and in good faith and granting relief would prejudice the interests of the Government.”
For more information and a sample 475 election statement, see Green’s 2020 Trader Tax Guide, Chapter 2, on Section 475 MTM.
Darren Neuschwander CPA contributed to this blog post.
Massive Market Losses? Elect 475 For Enormous Tax Savings
February 29, 2020 | By: Robert A. Green, CPA | Read it on
With heightened market volatility in Q1 2020, many traders incurred massive losses. Those who qualify for trader tax status (TTS) should consider a 2020 Section 475 election to turn capital losses into ordinary losses. Don’t get stuck with a $3,000 capital loss limitation for 2020 and a considerable capital loss carryover to 2021; unlock immediate tax savings with ordinary-loss deductions against wages and other income this year.
Election procedures: Existing TTS partnerships and S-Corps should attach a 475 election statement to their 2019 entity tax return or extension due March 16, 2020. TTS sole proprietors (individuals) should attach a 475 election statement to their 2019 income tax return or extension due April 15, 2020. The second step is to file a 2020 Form 3115 (Application for Change in Accounting Method) with your 2020 tax return. There are other benefits: 475 trades are exempt from dreaded wash sale loss adjustments, and profitable 475/TTS traders are eligible for the 20% QBI deduction if they are under the QBI taxable income thresholds.
Example 1: A TTS securities trader incurred a capital loss of $103,000 in Q1 2020. He elects Section 475 on securities only for 2020 by April 15, 2020, converting the Q1 capital loss into an ordinary loss on Form 4797 Part II. He also plans to deduct $12,000 of trading business expenses on a Schedule C. He intends to offset the entire trading business loss of $115,000 against a wage income of $175,000 for a gross income of $60,000. Without a 475 election, this trader would have a $3,000 capital loss limitation on Schedule D, a $12,000 ordinary loss on Schedule C, and a gross income of $160,000. He would also have a capital loss carryover to 2021 of $100,000. By deducting the entire $100,000 in 2020 with a 475 election, the trader generates a considerable tax refund.
More about 475
Traders eligible for TTS have the option to make a timely election for the Section 475 accounting method on securities and/or commodities. Section 475 is mark-to-market (MTM) accounting with ordinary gain or loss treatment. MTM imputes sales of open positions at the year-end at market prices. Without MTM, securities traders use the realization (cash) method with capital gains and loss treatment, including wash sale loss adjustments and the annual $3,000 capital loss limitation.
Caution: Sole proprietor (individual) TTS traders who missed the Section 475 MTM election date (April 15, 2019, for 2019) can’t use ordinary-loss treatment for 2019 and are stuck with capital gains and losses and perhaps capital-loss carryovers to 2020. Carefully consider a 475 election for 2020, as you need capital gains to use up capital loss carryovers, and 475 is ordinary income.
A new entity set up after April 15, 2020, could deliver Section 475 MTM for the rest of 2020 on trading losses generated in the entity account if it filed an internal Section 475 MTM election within 75 days of inception.
Ordinary losses offset all types of income (wages, portfolio income, and capital gains) on a joint or single filing, whereas capital losses only offset capital gains. Plus, business expenses and ordinary trading losses comprise a net operating loss (NOL) carry forward.
By making a 475 election on securities only, TTS traders retain lower 60/40 capital gains rates on Section 1256 contracts (futures), and they can segregate investment positions for long-term capital gains.
The new tax law TCJA introduced an “excess business loss” (EBL) limitation starting in 2018. For 2019 the inflation-adjusted EBL limitation is $510,000 married and $255,000 other taxpayers. The EBL applies to Section 475 ordinary losses and trading expenses. Add an EBL to an NOL carryforward. For example, a single taxpayer with a $300,000 ordinary loss from 475 and trading costs, and no other wage or business income, might have an EBL of $45,000.
TCJA offers a 20% qualified business income (QBI) tax deduction for pass-through businesses, including sole proprietors. TTS trading is a specified service activity. QBI includes 475 ordinary income; whereas, it excludes capital gains/losses, portfolio income, and forex. TTS expenses are negative QBI. A profitable TTS/475 trader is eligible for the QBI deduction providing their taxable income is not over the QBI thresholds.
Don’t miss the 475 election deadline
Applying for 9100 relief within six months of the 475-election due date by private letter ruling (PLR) is an expensive process, and it’s likely to fail. Only one trader won this type of relief, Mr. Vines displayed no hindsight and good faith, and he had a perfect set of factors. In a recent PLR 202009013, dated November 15, 2019, the IRS ruled, “Taxpayers are not entitled to § 301.9100 relief to make a late § 475(f)(1) election because Taxpayers did not act reasonably and in good faith and granting relief would prejudice the interests of the Government.”
For more information and a sample 475 election statement, see Green’s 2020 Trader Tax Guide, Chapter 2, on Section 475 MTM.
Darren Neuschwander CPA contributed to this blog post.
