The MTM election is fairly straightforward, especially when an example of a timely election is provided. However, missing the election can have disastrous results. But help has arrived ...
An extension of time to make the MTM election is explained under Reg Sec 301.9100-3 as one of those “any other” elections that are not specifically addressed in other sections.
Under this Regulation, two conditions must be met:
1. The taxpayer acted reasonably and in good faith, and
2. If the position of the government will not be prejudiced by the granting of relief.
There are several interesting points regarding the two conditions.
• The taxpayer is specifically prevented from using hindsight as a justification for making the election, which makes sense given the procedures for making the election. So, are the procedures actually fair in light of a rapidly moving market?
• The government’s interest is prejudiced if the election is made for a closed period, which again makes sense, but also if the election results in a lower tax liability, and, isn’t that the whole point?!
Therefore, given these conditions and restrictions, relief is available, but it is an uphill battle. Preparing the application for relief is a detailed effort and, as always, must be signed under penalties of perjury.
My recommendation ... let a tax professional prepare this for you. The IRS scrutinizes MTM elections carefully, so you are already behind the “eight ball” in that you are assuming ‘Trader in Security’ status plus making a MTM election to reflect substantial losses and you have missed the election … Not exactly a good start.
It has been successfully argued. Take a look at the Vines case.
If you want to elect MTM treatment, setup another trading entity and make a timely election for it. For a new entity, you must make the election by the 15th day of the third month - or basically within 2½ months.
No formal statement must be made to IRS in order to make the election. The election is made during a board of directors meeting and placed into the minutes of the meeting. Then the entity marks to market all securities at year-end.
It would be a good idea to attach the election/board meeting minutes to the timely filed tax return for the first year. Make sure the election is dated before the 15th day of the third month of the new entity’s existence.
Quick Links to:
So you have made the MTM election according to the procedures detailed above. Now what?
Let’s say you made the election timely with your 2013 tax return filed on April 15, 2014. The election is therefore effective for the 2014 tax year.
Jan 1, 2014 - Calculate the adjustment for the beginning of the year by completing the 481(a) adjustment spreadsheet. If the adjustment is negative, it must be taken in 2014; if the adjustment is positive but less than $25,000 it must be taken entirely in 2014; if the adjustment is $25,000 or greater, then the adjustment may be spread over the next four years, including 2014.
During 2014 - Trade the account as a “Trader in Securities” making note of the new basis in the shares open as of Jan 1, 2014
Dec 31, 2014 - Use the MTM spreadsheet to calculate the market value of the open securities in your portfolio. Any differences in the market value and your cost basis results in a taxable transaction.
April 15, 2015 - File tax return with MTM status as a “MTM Trader in Securities.” Do not report gains and losses on Sch D nor investment expenses on Sch A. Report trading gains and losses, including the gains and losses resulting from the MTM year-end adjustment on Form 4797, Part II (possibly Form 6781 as well) and the expenses on Sch C and possibly Form 8829.
During 2015 - Trade the account as a “Trader in Securities” making note of the new basis in the shares marked to market as of Dec 31, 2015.
Note: The difference between “MTM Trader in Securities” and “Trader in Securities” is simply for reporting purposes. A “MTM Trader in Securities” is subject to the same trading criteria described in the Trader section of this website.
Dec 31, 2015 - Use the MTM spreadsheet to calculate the market value of the open securities in your portfolio. Any differences in the market value and your cost basis results in a taxable transaction.
If during this period you decide not to continue as a “MTM Trader in Securities” you have two alternatives open to you:
1. Request revocation from IRS, or
2. Setup a new entity and transfer your entire trading account into the new entity
Download a fill-in-the-blank Election form by clicking on the arrow above
The Mark-to-Market template has an interactive feature to help determine the filing dates for making and maintaining the MTM Election.
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