Registered User
Joined: 8/31/2009
Posts: 60
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I trade few times a month and am thinking of opting for "MARK TO MARKET".
My Understanding:
- You have to apply for MTM during the current year to be considered for the next year
- Wash Sales rule doesn't apply to MTM trader
- With MTM election, trading gains and losses are converted to ordinary income and loss
- Trader who has not made the mark-to-market election can deduct only $3,000 of net capital loss
- With MTM election, trading loss isn't subject to $3K limitation, and can carry back as well as forward. The difference can be huge.
- Once in MTM, you have to continue to use the mark-to-market method for all future years.
Questions:
- Being a Infrequent trader, What is the probability of getting Mark To Market Trade status
- What are the negatives of being in MTM status
- Till IRS approves my MTM status, What can be done to protect against Wash sales rule
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Registered User
Joined: 9/25/2007
Posts: 1,506
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I'm not exactly sure what you're trying to accomplish ...
Whether it's to take losses against income (where there is no offsetting profit) in excess of the $3000 limit ...
Or whether you're simply trying to protect a long position (which you plan to initiate again) against losses in a falling market ...
Have you ever heard of going "Short Against The Box" ?
Would this accomplish any of you goal ?
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Registered User
Joined: 12/31/2005
Posts: 266
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if your an infrequent trader, you won't qualify. probably won't even if you are a frequent trader.
to avoid the wash sale buy a similiar security instead.
a position trader who makes the mark-to-market election loses the ability to do year-end tax planning by selling losers and holding winners.
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Registered User
Joined: 9/25/2007
Posts: 1,506
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QUOTE (driger) if your an infrequent trader, you won't qualify. probably won't even if you are a frequent trader.
Yeah ... you have to remember US Govt Policy ...
"When you win ... we all win together ... When you lose ... you lose alone ..."
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Registered User
Joined: 12/31/2005
Posts: 266
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QUOTE (realitycheck) QUOTE (driger) if your an infrequent trader, you won't qualify. probably won't even if you are a frequent trader.
Yeah ... you have to remember US Govt Policy ...
"When you win ... we all win together ... When you lose ... you lose alone ..."
unless your a banker, of course.
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Registered User
Joined: 8/31/2009
Posts: 60
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By going thru some of the Interesting articles within this forum
Say Trading for a living : http://forums.worden.com/Default.aspx?g=posts&t=530 and others...
. It is possible to consistently make 50%+ annual returns every year
. Even for experienced traders with time tested system setups, Winning Trades are little over 50%
. Paper trading is good, but will never learn their own psychology till they start betting with real money
Now... From Beginner to an Accomplished Trader, one still has to face the drawdowns and losses say $10K+ in a year. If one has a $50K loss in a year, carrying over capital losses for 15+ years ($3k/yr), Hmmm...
So, MTM seems to be a good way to seek some solace from the taxman. There must be some Traders who were able to get this approved without having to trade 800+ trades in a year.
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Registered User
Joined: 12/31/2005
Posts: 266
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mtm is designed for daytraders, because they exit all their positions at the eod, anyway.
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Registered User
Joined: 9/25/2007
Posts: 1,506
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QUOTE (rysa)
Now... From Beginner to an Accomplished Trader, one still has to face the drawdowns and losses say $10K+ in a year. If one has a $50K loss in a year, carrying over capital losses for 15+ years ($3k/yr),
Yeah but ....
You're assuming that you have NO profits in that next 15 year time frame ....
As soon as you have a profitable year ... your loss carryforard is deducted from you profit ...
Let me give you an example ...
Let's say that you did indeed lose 50K your first year ... you can only write off $3K ... so you carry $47K forward ....
The next year you make $30K .... so you write off that $30K against your loss carry forward ... plus another $3K .... that leaves you with a $14K loss to carry forward ...
And so on ...
Your scenario sort of assumes that you're planning to lose your ass the first year ... and then quit trading ...
Start small .... and resist the urge to "bet the farm" on the "sure thing" ...
You'll learn just as much trading 50 share blocks ... as 50,000 share blocks ...
And you'll sleep a helluva lot better at night too ....
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Registered User
Joined: 8/31/2009
Posts: 60
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QUOTE (realitycheck) As soon as you have a profitable year ... your loss carryforard is deducted from you profit ...
Let me give you an example ...
Let's say that you did indeed lose 50K your first year ... you can only write off $3K ... so you carry $47K forward ....
The next year you make $30K .... so you write off that $30K against your loss carry forward ... plus another $3K .... that leaves you with a $14K loss to carry forward ...
realitycheck - Thanks for the clarification...
other point is - If one is experiencing losses 2-3 years in a row, they sh'd definitely consider a different line of business altogether...
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Registered User
Joined: 9/25/2007
Posts: 1,506
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QUOTE (rysa) other point is - If one is experiencing losses 2-3 years in a row, they sh'd definitely consider a different line of business altogether...
Agreed ....
But remember ....
This isn't a race ....
The market will always be there ....
There will always be opportunities ...
You merely have to survive until you can develop your skill set ...
Start small ... and stay small for at least a year ...
The trap that most folks fall into is that they start small ... they have a short string of winning trades ... and all of a sudden they're a "genius" ... they have it all figured out ....
Since they have it all figured out ... they start making big bets ...
And the market hands them their butt .... and they never trade again ...
It will take time ... not trades .... to experience what the market is capable of giving to you ... and taking from you ...
Just take it easy ....
And remember to have fun ....
As life is too short to spend it any other way ....
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Registered User
Joined: 1/30/2009
Posts: 267
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QUOTE (realitycheck)
QUOTE (rysa) other point is - If one is experiencing losses 2-3 years in a row, they sh'd definitely consider a different line of business altogether...
Agreed ....
But remember ....
This isn't a race ....
The market will always be there ....
There will always be opportunities ...
You merely have to survive until you can develop your skill set ...
Start small ... and stay small for at least a year ...
The trap that most folks fall into is that they start small ... they have a short string of winning trades ... and all of a sudden they're a "genius" ... they have it all figured out ....
Since they have it all figured out ... they start making big bets ...
And the market hands them their butt .... and they never trade again ...
It will take time ... not trades .... to experience what the market is capable of giving to you ... and taking from you ...
Just take it easy ....
And remember to have fun ....
As life is too short to spend it any other way ....
This is a very good post realitycheck.
This is exactly what happened to me. I saw my first few trades raise my account balance by 20% in two months. Everything I did turned to gold (and gold was one of the trades). I was a "genius" and the sky was the limit. I quickly increased my position sizes and that was about the point I got my butt handed to me. Fortunately, I was able realise my system shortcomings and get out before I destroyed my account. I am now back to papertrading a new system and will not go "live' again until said system is well proven and burned into my brain. But, so far, so good.
So, I had to laugh when I read your post.
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Registered User
Joined: 11/14/2004
Posts: 1
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If there are any accountants out there, please correct anything in this post that is wrong. It is what I've been able to glean from my checking, not personal experience.
If you have losses from the past you have been carrying forward, I think you lose them if you go MTM. One thing I don't like is paying taxes on gains that could turn into losses. If you are up at the end of the year, and the market turns down, you still owe for the level of "earnings" you had at the end of the year. The IRS lets you take all the risk of holding those positions. You will get your losses and the resulting decrease in taxes at the end of the next year, but why loan them your money for free?
As others have posted, you will not get trader status if you only trade a few times per month. Do you get most of your income from trading? Do you trade regularly, during all times of the day? People who trade a lot more than you do have been turned down for trader status just because they only trade in the morning, for example. Most of all, you will have a hard time getting trader status if you work at another job.
If you want to avoid the whole wash sale mess, be out of all positions at the end of the year. Take a vacation; it's the holidays!
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Registered User
Joined: 8/31/2009
Posts: 60
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For an Active trader (500++ trades / yr), Is there a tax benefit from switching to MTM ?
What was the deciding factor for those who finally decide to switch to MTM?
During Tax Time with 1000s of Trades and say $100K+ capital, some of us would have done this analysis. Would some of you care to share...
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Registered User
Joined: 9/25/2007
Posts: 1,506
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rysa ...
If I may make a suggestion ... type the following into a Google seach box ...
Who qualifies for IRS trader status
You will notice that there are entire forums dedicated to this single issue ...
As well as a myriad of trader related accounting type sites ...
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Registered User
Joined: 8/31/2009
Posts: 60
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If one were to liquidate all positions before the end of the year i.e. No open positions say on DEC 31 st, Do they still have to worry about WASH SALES?
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Registered User
Joined: 9/25/2007
Posts: 1,506
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Theoretically ...
Yes ....
If you reinitiate one of the positions in less than 30 days ...
If you have a position that you want to close ... and write off ... this badly ...
Why would you want to reinitiate it so quickly ?
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Registered User
Joined: 8/31/2009
Posts: 60
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I am practising on this strategy -
stick to DJ-30 Index and trade on both sides. When it hits the resistance - go Short and and Long on the support side. Initially, I ran into losses, but as of now - up 35%++ in one account and down 22% in a different account.
One of them is an Retirement account and the down is the margin account. Being the beginner - still trying to overcome greed, not to use margin etc...
Plan of action is to liquidate all my positions before Dec 31. But will IRS still want us to calculate WASH SALES for every losing trade ?
I wouldn't mind putting together an Excel spreadsheet to generate this WASH SALES info. But still trying to understand the exact rules...
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Registered User
Joined: 12/31/2005
Posts: 266
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QUOTE (rysa) I am practising on this strategy -
stick to DJ-30 Index and trade on both sides. When it hits the resistance - go Short and and Long on the support side. Initially, I ran into losses, but as of now - up 35%++ in one account and down 22% in a different account.
One of them is an Retirement account and the down is the margin account. Being the beginner - still trying to overcome greed, not to use margin etc...
Plan of action is to liquidate all my positions before Dec 31. But will IRS still want us to calculate WASH SALES for every losing trade ?
I wouldn't mind putting together an Excel spreadsheet to generate this WASH SALES info. But still trying to understand the exact rules...
fyi-
This rule will continue to be difficult for the IRS to enforce. Purchases and sales occurring within an IRA are not reported on Form 1099-B and will not show up in your individual brokerage account statement. Yet the ugly consequence — permanent disallowance of the deduction — may serve as a deterrent even for people who might otherwise be inclined to play the audit lottery.
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Registered User
Joined: 12/31/2005
Posts: 266
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..........and
You do get to claim the loss -- just not now. Although the loss can't be claimed on a wash sale, the disallowed amount is added to the cost of the repurchased stock. So, the loss can be claimed when it is finally disposed of, other than in a wash sale.
Example: Larry Laundry buys 500 shares of ABC Corp. for $10,000 and sells them on June 5 for $3,000. On June 30, he buys 500 shares of ABC for $3,200. Since the stock was "repurchased" within 30 days of loss-sale date, the wash sale rules apply. Larry can't claim his $7,000 loss. Instead, he must adjust his basis in the repurchased shares. His basis in his "new" 500 shares is $10,200 -- the actual cost, plus the $7,000 disallowed loss.
Larry would also be in violation of the wash sale rules if he purchased his "new" shares on June 1 and then made the loss sale on June 5. Remember, the rule is 30 days before or after the date of the loss sale. But, also remember that if Larry had waited the required 30 days before he "repurchased" his shares, there would be no wash sale.
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Registered User
Joined: 8/31/2009
Posts: 60
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A typical story from Wash-Sale Hell
> In 1996, I was an active day trader. At the end of the year, I had
> lost several thousand dollars. I'm currently being audited for that
> year and, because of the wash sale rule, the IRS wants to push my
> losses into 1997. Instead of a loss, they claim I had a capital gain
> of almost $250,000, creating a tax liability of more than $80,000. On
> top of this, they want to charge me almost $40,000 in interest,
> including interest for the 19 months it has taken for them to complete
> their review of my return!
>
> This seems grossly unfair to me, and I am in the process of fighting
> their determination and would like to change the wash sale rules so
> that they don't apply to active traders. If you have a horror story
> about trading and the IRS, please send me a message.
-----------------------------------------------------------------------------------------------
To not get entangled in this wash sales mess - here is a suggestion from a website -
Do not trade the same stock for 31 days in the beginning of the year and also 31 days at the end of the year. Remaining period - go crazy...
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Registered User
Joined: 12/31/2005
Posts: 266
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...... and just trade a similiar stock but not "substantially" similiar, during that period.
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Registered User
Joined: 8/31/2009
Posts: 60
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QUOTE (driger) ...... and just trade a similiar stock but not "substantially" similiar, during that period.
Can you give me a example for a stock which is substantiall similar to the following stocks:
MSFT
BAC
GOOG
AAPL
Thanks....
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Registered User
Joined: 12/31/2005
Posts: 266
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QUOTE (rysa) QUOTE (driger) ...... and just trade a similiar stock but not "substantially" similiar, during that period.
Can you give me a example for a stock which is substantiall similar to the following stocks:
MSFT
BAC
GOOG
AAPL
Thanks....
msft, goog, aapl lead the naz, so qqqq would probably be similiar or etf swh might work for softy,
bac, use kbe, a money center bank etf, or another big bank like wells fargo, wfc.
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Registered User
Joined: 9/25/2007
Posts: 1,506
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rysa ...
It's still easy enough to get by ...
Let's say that I trade the DIA ... long ... short ... etc ...
For the month of January ... I will still take my buy/sell signals from the DIA ...
But I will trade the SPY instead ...
The IRS isn't gong to make a case out of this "substantially similar" stuff ... unless it is the same security ... or a derivative of the same security ...
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Registered User
Joined: 12/31/2005
Posts: 266
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the irs doesn't even have a definition for substantially similiar.
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Registered User
Joined: 8/31/2009
Posts: 60
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WASH SALE RULES -
Does someone have detailed rules on how to generate Wash Sale Rules ?
I am planning to write either a EXCEL Script or a PERL script to generate wash sales for Schedule D. I dont mind sharing once it is done with the group.
INPUT : STOCK, TXN_DATE, TXN_TYPE (B/S), QTY, PRICE
OUTPUT: STOCK, DATE_BOUGHT, DATE _SOLD, COST_BASIS, SALE_PRICE, GAIN_LOSS
B:BUY , S:SELL
Rules:
. Provide list of stock sales for the prior year (Account for Wash Sales carry over)
. Order stock Txns by Txn date
. For the current SALE TXN - Identify the first BUY Txn.
. Calc Gain / Loss
. If Loss see if same stock bought within the prior/next 30 days
. ...
Can others fill in the details...
I need to better understand - on how to assign wash sales - when Shares are bought on multiple dates and Sale txns are also made on different/multiple dates and they need to be matched partially.
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Registered User
Joined: 8/31/2009
Posts: 60
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I had sent in my MTM application request along with my Tax Returns this April.
I haven't received any communications whether the application was approved or not.
Should I assume, my application has been approved or Is there a number we can talk to to get the status ?
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