Trader in Securities

[Sid Stafman]

Taxpayer purchasing and selling US Bonds and Notes. Qualifies as trader. All his transactions are involved with accrued interest on the purchase and sale of bonds. He will be reporting on a Sch C (as a sole member of LLC). Is he required to include as a cost in calculating gain/loss upon disposition, or can he treat the interest separately as INTEREST EXPENSE & INCOME.

If he elected accrual basis would the tax treatment be any different?

[BOB W]

Taxpayer purchasing and selling US Bonds and Notes. Qualifies as trader. All his transactions are involved with accrued interest on the purchase and sale of bonds. He will be reporting on a Sch C (as a sole member of LLC). Is he required to include as a cost in calculating gain/loss upon disposition, or can he treat the interest separately as INTEREST EXPENSE & INCOME.

If he elected accrual basis would the tax treatment be any different?

Something does not sound right. If he has elected to be in the business of a professional trader (mark to market) he is already on an accrual basis in regards to his business activity. If no election was made, he is just a trader and all activity goes on Sched. D & B.

Am I missing something?

[Sid Stafman]

Trader in Securities

Something does not sound right. If he has elected to be in the business of a professional trader (mark to market) he is already on an accrual basis in regards to his business activity. If no election was made, he is just a trader and all activity goes on Sched. D & B.

Am I missing something?

He does not want to make the "475" election (mark to market), and I believe he does not have to make that election, to be a professional trader. Therefore he is still a trader, but reports all his gains/losses on Sch D (advantegeous for using against capital loss carryovers & current year ('09) other (non-trader) capital losses.

As you correctly state it gets reported on Sch D and Sch. B (interest income rec'd on bonds), but I am not sure whether the "accrued interest" on the buys and sells, should properly be considered additional costs of the those transactions, or just dealt with on Sch. B.

What I am trying to accomplish is deducting the accrued interest he paid on bond purchases in Nov. & Dec, '09, which he still owns on 12/31/09, but has rec'd no interest yet in '09.

[BOB W]

Yes, your trader can qualify as a business without the Mark to Market election. My mistake. Your trader is allowed to deduct expenses on Schedule C.

I would include accrued interest in basis (discount or premium), when sold, on Schedule D.

[Skeemo]

Election as trader

If a trader wants to elect to trade as a business, but does NOT want to make mark-to-market election, is any form or application necessary, or does he just start filing using Schedule C for expenses?

[Snaggletooth]

Both Ways?

Therefore he is still a trader, but reports all his gains/losses on Sch D (advantegeous for using against capital loss carryovers & current year ('09) other (non-trader) capital losses.

What I am trying to accomplish is deducting the accrued interest he paid on bond purchases in Nov. & Dec, '09, which he still owns on 12/31/09, but has rec'd no interest yet in '09.

What I am reading here is that this guy wants all the advantages of treating income as an Investor but wants the deductions available on a schedule C as if he is a professional dealer. He can't have it both ways.

If he wants capital gains treatment, reduced tax rates, etc. that comes with investing, then his interest is Form 4952 and even that can void out capital gains rates. If he wants to deduct interest expense as an operating expense on Schedule C, then the revenue becomes full-up as Schedule C revenue.

I'm not speaking of amortizable premium on bonds, which should remain part of the basis. Amortizable discount is OID-type interest income and reports on Sch B.