Mark To Market Accounting Method
Beginning in 1997, the IRS has permitted traders to elect a method of accounting called Mark-To-Market (MTM).
Exactly What is Mark To Market?
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 year end prices become the cost basis of these going into next tax year.
Simplified Tax Reporting - May Reduces Taxes
Many active traders find this election appealing as a way to make filing simpler — and possibly reduce their taxes. However, there are qualifications and an election process that must be followed. Please see the How To Elect MTM topic below for details.
There are two major advantages of electing MTM:- Since all positions marked to market (priced to year end market prices) at year end, there are no wash sales to calculate or report to the IRS.
- If you happen to have a loss from trading greater than $3,000 you can deduct this loss from any other income, and possibly ammend a previous year's tax return and get a refund.
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.
Next, learn about pros and cons of mark-to-market accounting for traders.
Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Armen Computing Ltd. does not make investment recommendations nor provide financial, tax or legal advice. You are solely responsible for your investment and tax reporting decisions. Please consult your tax advisor or accountant to discuss your specific situation.
