According to the IRS: "A trader in securities or commodities may elect under section 475(f) to use the mark-to-market method to account for securities or commodities held in connection with a trading business. Under this method of accounting, any security or commodity held at the end of the tax year is treated as sold (and re-acquired) at its fair market value (FMV) on the last business day of that year."
What this basically means is that all open positions at year end are "marked to market" or priced to year end market prices to close out the position on paper. Your open positions are still open, but now the the year end prices become the cost basis of these going into next tax year.
PROS:
If you are a active trader in securities or commodities, with a mark-to-market election in effect for the current tax year, then the following benefits can be yours:
CONS:
Mark to Market accounting is not without some downside. For example, if you have a large unrealized gain at year end in one or more of your open positions, you are forced to close those positions (on paper) using the year end prices which increases your current year taxable gain. This is true whether you are long or short. Normally you do not realize gains until you actually close your positions, so be aware of this at year end if you have elected MTM.
IRS Pub 550 states:
To make the mark-to-market election for 2006, you must file a statement by April 15 of the year you plan on using MTM accounting. This statement should be attached to either your individual income tax return or a request for an extension of time to file that return. The statement must include the following information.
If you are not required to file an income tax return, you make the election by placing the above statement in your books and records no later than March 15. Attach a copy of the statement to your return. Do not file form 3115 at this time as it may cause you to lose your MTM status.
After making the election to change to the mark-to-market method of accounting, you must change your method of accounting for securities when you file your taxes for the first year using MTM accounting. You do this by filing Form 3115 - Application for Change in Accounting Method.
Form 3115 is also where you attach your section 481 adjustment - see How to report gains & losses Market to Market.
Once you make the election, it will apply to the current tax year and all later tax years, unless you get permission from IRS to revoke it. The effect of making the election is described under Mark-to-market election made, earlier.
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For more details on the mark to market |
Also see: Rev. Proc. 99-17 on page 52 of Internal Revenue Bulletin 1999-7 at www.irs.gov/pub/irs-irbs/irb99-07.pdf. |
MTM Election Deadline:
Unless you are a new taxpayer, the election must be made by the due date
(not including extensions) of the tax return for the year prior to the year for
which the election becomes effective. In other words, if you have not made this
election by April 15 of the current tax year, then you have to wait till next
year to do so.
If you made the mark-to-market election, you should report all gains and losses from trading as ordinary gains and losses in Part II of Form 4797, instead of as capital gains and losses on Schedule D. In that case, securities held at the end of the year in your business as a trader are marked to market by treating them as if they were sold (and re-acquired) for fair market value on the last business day of the year.
The instructions for Form 4797 Line 10 states:
Report on line 10 all gains and losses from sales and dispositions of
securities or commodities held in connection with your trading business,
including gains and losses from marking to market securities and commodities
held at the end of the tax year.
Since all trades are priced to year end market prices and are therefore held one year or less, all of the MTM trades are by definition short term and are considered ordinary and are to be listed in Part II of this form.
There are seven columns in Part II as shown below:
| (a) Description of property |
(b) Date acquired | (c) Date sold | (d) Gross sales price |
(e) Depreciation | (f) Cost or other basis |
(g) Gain (or loss) for entire year |
Column (e) Depreciation is not used for the purposes of investments, so we will concern ourselves only with columns a-d, and f-g.
Once again, all of the same trade matching rules apply as described in our IRS schedule d tax topic under the heading: Matching and entering your trades on schedule d so having an automated method of doing so can save you many hours of grief.
TradeLog MTM™ was designed to meet the tax needs of active traders in securities who have elected or are about to elect the mark to market (MTM) accounting method.
In addition to automating the process of importing your trades from your online broker and matching them properly for attaching to your IRS Form 4797, TradeLog MTM™ provides the necessary mark to market accounting procedures and reports which greatly simplifies the filing of your trader tax return.
Please note: This information is provided only as a general guide and is by no means to be taken as official IRS instructions. As always, please consult your tax advisor or accountant for details.