Section 475(f) of the Internal Revenue Code provides that a trader in securities can make a “mark-to-market” election to treat increases or decreases in the value of securities as ordinary income/loss instead of capital gain/losses. Additionally, all realized gains/losses will be treated as ordinary income/loss and not as capital gain/loss.
With the deadline for partnerships to make this election for 2020 coming up soon, here’s what to know.
Timing of making the electionTaxpayers looking to make this election must file for it no later than the unextended due date for the preceding year’s tax return. The election statement must be attached to that tax return or, if a request is being made for an extension of time to file that return, must be attached to that request. For example, for it to be effective for 2020, partnerships must make this election by March 16, 2020, for existing calendar year taxpayers. For new taxpayers not required to file a 2019 tax return, the election should be placed in the taxpayer’s books and records within 75 days after the start of their year, then attached to their 2020 tax return.
Benefits of making the election
As noted above, qualifying taxpayers who make this election can treat losses from stock or security sales as ordinary losses, not capital losses. Capital losses generally cannot be used to offset ordinary income and will be limited to $3,000 per year at the individual level. This is significant for certain trading strategies that could result in significant capital losses and ordinary income that would be unable to offset absent a 475(f) election. In addition, unrealized losses will be marked-to-market for tax purposes, allowing for acceleration in the timing of recognition of the loss.
This election also avoids certain tax adjustments such as wash sales and straddles and thereby makes tax planning easier, as book and taxable income will be in line with each other.
There are many nuances associated with this election. As an example, trader funds can elect mark to market treatment for securities only, and not include Section 1256 contracts. This can be beneficial as Section 1256 contracts have a beneficial 60% long-term, 40% short-term rate associated with them regardless of holding period.
A Section 475(f) election should only be made after carefully reviewing the pros and cons of the election and having an in-depth discussion with your tax advisors. Do not hesitate to reach out to CohnReznick with questions.
Subject matter expertise
CPA, Partner, Financial Services Industry Leader – Northeast
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Strategic Tax Issues for Capital Markets
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.