As the year comes to a close, day traders with net losses may wish they had made a mark-to-market election. This election, under IRC 475(f), permits a taxpayer to treat trading losses as ordinary, with the benefit of being able to deduct them in full. The capital loss limitation and wash sale rules do not apply if this election is made.
Consistent with the IRS’ long-standing position on the matter, recent private letter ruling PLR 202150001 stated that a taxpayer who would benefit from hindsight in making a late election is de facto not acting in good faith. The taxpayer’s request for retroactive election approval was denied.
IRC 301-9100 sets forth various procedures for late or missed elections. Often referred to as “9100 relief”, this section sets forth the specific criteria that must be met in order to be granted relief. Subsection 3(b)(3)(iii) states that “if facts have changed since the due date for making the election that make the election advantageous to the taxpayer”, that is by default deemed to not have acted in good faith. Getting bad advice, not being aware of the election, etc. do not overcome the benefit of hindsight provision. Being able to prove that a taxpayer did not use hindsight is a very high bar. One such example of such proof is a taxpayer’s net losses existing at the time of the late election request were equal to or less than the net losses that existed as of the due date of the election.
A further hurdle must be overcome in subsection 3(c), concerning interest prejudicial to the government. The two major obstacles pertaining to late MTM election relief in this subsection are:
- If granting the election would result in a lower tax liability, the government’s interest is deemed to be prejudiced.
- If an adjustment under IRC 481(a) would be required. This adjustment occurs when there is an accounting method change. Changing realized (which is the default method) to the mark-to-market is an accounting method change.
If you otherwise meet day trader criteria as discussed in a prior article, the next election that can be made is for the 2022 tax year. It is too late to file for 2021. This election is due by March 15, 2022 for partnership and S corporation filers, and April 15, 2022 for C corporation and individual filers. The election is either filed with the tax return or with the extension by these applicable dates, and will be effective retroactive to January 1, 2022. These dates are fixed – filing extensions do not extend the date to make this election.
If you are a day trader contemplating this election, or are not sure if you qualify as a day trader, please contact Aronson’s tax controversy lead partner Laurence C. Rubin, CPA at 301-222-8212 to discuss your situation.