'Securities Gain For Traders'

Key takeaways: Section 475 election -

The 475 (f) election is an option available to traders who buy and sell securities. In this context, securities include equity, debt, hybrids, as well as derivative instruments. It's important to note that this is available to traders only.

For this purpose, it is important to understand the definition of investors, dealers, and traders in this regard.

- Investors: Investors are the people who invest money and expect dividends, interest, and capital appreciation in return. Investing is not their day-to-day business. In this case, income or expense on sale is reported in Sch. D of 1040 and 8949.

- Dealers: These may be individuals as well as entities. Dealers have customers and they earn by way of commission or brokerage charged to customers for each contract of purchase and sale of securities. Dealers have to identify the portion of the securities in which they are dealing as traders (meaning in the ordinary course of business) and securities in which they are acting as investors. This is done by keeping the necessary records. For securities held in the ordinary course, mark-to-market rules can be chosen.

- Traders: a person is a trader in this regard if the following conditions are satisfied:

1) Rather than a dividend, interest, or capital appreciation, he/she seeks a profit from market fluctuations.

2) This is a significant activity (it accounts for more than 20% of his or her total activities).

3) He or she engages in such an activity on a regular and consistent basis.

Also, the following facts must be kept in mind while deciding on whether the particular business is a security trading business or not:

1) The total number of transactions and dollar amounts recorded during the fiscal year.

2) The average or typical duration of a security's holding period

3) the extent to which the activity is performed in order to pay household expenses

4) the amount of time spent

Traders report income or loss in Sch. C of the 1040 as a business income or loss.

- Traders can make a mark on the market by following the prescribed procedure, but investors cannot. If they do so, they can claim income or loss from the sale of the investment as ordinary income. Capital gains and losses aren't reported in this case. In this case, the rules about how much money you can lose and how many times you can sell something still apply, though.?

If an election has to be made, then it must be filled by the due date. and not an extension date. For instance, if the 1040 is due on April 15th, the election must be filed on or before that date. Not after that, even if the extension is filled.

How to file an election?

By attaching a statement to the income tax return, or by submitting a request for an extension if the form is filled out.?The following are the contents of the election statement:

1) the issue on which you are voting

2) the tax year in which it is applicable

3) the profession or trade for which you are voting

After filing this, one needs to change the accounting of securities to mark to market under revenue procedure 2019-43 section 24.01. and one has to file a 3115 form as well.

However, no filling 3115 doesn't make the election invalid. To change this choice, you need to file a revocation by the due date of your tax return under revenue procedure 2019-43 section 24.02.?

For more instructions, you can refer to Sch. D of 1040.