Section 475 MTM Accounting

Section 475 MTM exempts traders from capital loss and wash sale loss limitations.

Business traders qualifying for TTS have the option to elect Section 475 MTM accounting with ordinary gain or loss treatment in a timely fashion. Caution: Individual business traders who miss the Section 475 MTM election date (April 15, 2019, for 2019) can’t claim business ordinary-loss treatment for 2019 and will be stuck with capital gains and losses and perhaps capital-loss carryovers.

A new entity set up after April 15 can deliver Section 475 MTM for the rest of 2019 on trading losses generated in the entity account if it files an internal Section 475 MTM election within 75 days of inception. This election does not change the character of capital loss treatment on the individual accounts before or after its inception. The entity is meant to be a fix for going forward; it’s not a means to clean up the past problems of capital loss treatment.

Ordinary trading losses can offset all types of income (wages, portfolio income, and capital gains) on a joint or single filing, whereas capital losses only offset capital gains. Plus, business expenses and business ordinary trading losses comprise an NOL, which can be carried forward. It doesn’t matter if you are a trader or not in a carryforward year. Business ordinary trading loss treatment is the biggest contributor to federal and state tax refunds for traders.

There are many nuances and misconceptions about Section 475 MTM, and it’s important to learn the rules. For example, taxpayers are entitled to contemporaneously segregate investment positions that aren’t subject to Section 475 MTM treatment, meaning at year-end, they can defer unrealized gains on properly segregated investments. Taxpayers can have the best of both worlds — ordinary tax losses on business trading and deferral with lower long-term capital gains tax rates on segregated investment positions. We generally recommend electing Section 475 on securities only, in order to retain lower 60/40 capital gains rates on Section 1256 contracts. Far too many accountants and traders confuse TTS and Section 475; they are two different things, yet very connected.

Section 475 election procedures

Section 475 MTM is optional with TTS. Existing taxpayer individuals that qualify for TTS and want Section 475 must file a 2019 Section 475 election statement with their 2018 tax return or extension by April 15, 2019. Existing partnerships and S-Corps file in the same manner by March 15, 2019.

Election statement. The MTM election statement is a straightforward paragraph; unfortunately, the IRS hasn’t created a tax form for it. It’s a version of the following…

Form 3115 filing. Don’t forget an essential second step…

Excerpt from Green’s 2019 Trader Tax Guide Chapter 2 Section 475 MTM Accounting