Is Your Client An Investor? A Trader? or a Mark-to-Market Trader

TAXMAMA.COM
Published by Eva Rosenberg, MBA, EA

FILING AS AN INVESTOR, TRADER, or MARK-TO-MARKET TRADER
Advantages, Disadvantages, and Reporting Requirements Summary

Investor	Trader	Mark-To-Market Trader

Anyone qualifies	Special rules	Special rules plus positive election / IRS approval needed to reverse

Gains are capital LTCG rates available	Gains are STCG taxed at ordinary rates Segregate LT holdings	Gains are STCG taxed at ordinary rates Segregate LT holdings

Losses limited to $3K/yr	Losses limited to $3K/yr	Unlimited losses allowed Potential NOL treatment

No SE tax	No SE tax	No SE tax

Expenses go to Sch A Limited by 2% AGI & Income phaseout rules	Expenses go to Sch C Unlimited deductibility	Expenses go to Sch C Unlimited deductibility

Margin Interest limited by Form 4952 & Sch A	Margin interest on Sch C	Margin interest on Sch C

No office-in-home	May be office-in-home	May be office-in-home

Wash sale rules apply	Wash sale rules apply	No wash sale rules apply

Reporting:

Transactions on Sch D	Transactions on Sch D	Transactions on Form 4797, Part II, Line 10 (Ordinary Income & Loss)

Expenses on Sch A	Expenses on Sch C Attach explanation	Expenses on Sch C Attach explanation

No special elections	No special elections	Affirmative election required in the Year previous to effective year. Form 3115 also required (no fee). Automatic approval, but IRS permission required to change.

Resources:

CFS Income Tax 1996 to 2000 Research CD-Rom
CCH Federal Tax Service
BNA Portfolio Plus
"Tax Tips for Day Traders" by Bill Bischoff, bbischoff@smartmoney.com
Tax Guide for Traders, Kaye A Thomas, Fairmark Press Inc, www.fairmark.com
Form 4797 Instructions (2000), Curt Freeman, Tax Forms Development Branch

About the author: NANCY E GOEDECKE, EA

Nancy E Goedecke, EA is a full-time practicing Enrolled Agent specializing in individual and small business taxation. She is an experienced teacher and a frequent presenter of income tax seminars for professionals across the country. Nancy is known for her ability to make comprehensive tax issues understandable and applicable in daily practice of attendees. Nancy became an EA and joined NAEA in 1986, is a Fellow of the National Tax Practice Institute and currently serves as Secretary of NAEA. She is also a member of the Internal Revenue Service Advisory Council (IRSAC) which meets at the national office of IRS with Commissioner Rossotti and his staff. Nancy is a Past President of the Massachusetts Society of Enrolled Agents and recipient of the 1989 "Enrolled Agent of the Year" award. As owner of Taxes & Money Management in Hudson, MA, Nancy is also a Registered Representative/Advisory Representative orchestrating comprehensive financial solutions to her clients.

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