475 Election for Day Trading

[ClanceyEA]

Client wants to be a day trader. He was unaware of the need to make this election in the year prior to starting this activity so for 2020 he cannot have the election. This is no way around this to make it effective for tax year 2020 correct? Also I have seen other posts that even if election is not made, taxpayer can still deduct expenses on schedule C with regard to day trading? Is this true? Is that due to the fact the day trading activity qualifies as a business? Thank you for your help

[Lion]

He can be in the business of trading by meeting the IRS requirements. Then he uses Schedule C and Schedule D. If he wants to make the mark-to-market election, he has to meet those requirements. Then he uses Schedule C and Form 4797.

https://www.irs.gov/taxtopics/tc429

[ClanceyEA]

He can be in the business of trading by meeting the IRS requirements. Then he uses Schedule C and Schedule D. If he wants to make the mark-to-market election, he has to meet those requirements. Then he uses Schedule C and Form 4797.

https://www.irs.gov/taxtopics/tc429

Right. He does meet requirements but since 475 election wasnt made on 2019 return, he cannot use mark to market election for 2020 tax return correct?

[ATSMAN]

Unless you are setup to deal with such clients, be careful. I had one client who graduated from being an arm chair stock picker (also ran an investment club) to an active day trader (quitting his full time job). I had to tell him that he outgrew my expertise and he had to find a CPA firm associated with his trading house to do his taxes. I could not charge him enough to keep up with the complexity of the laws. He actually thanked me for being honest with him.

[ClanceyEA]

Unless you are setup to deal with such clients, be careful. I had one client who graduated from being an arm chair stock picker (also ran an investment club) to an active day trader (quitting his full time job). I had to tell him that he outgrew my expertise and he had to find a CPA firm associated with his trading house to do his taxes. I could not charge him enough to keep up with the complexity of the laws. He actually thanked me for being honest with him.

Yes thank you for the advice. Luckily I still work with a CPA, who has been able to help me out whenever I get in over my head. So your previous client was a day trader who basically became a dealer? He was middling stocks?

[ClanceyEA]

So it is the correct position to file a schedule C with expenses and stock sales on sch D if client doesnt not have the mark to market election effective for the tax year? he could qualify as a day trader if he made a timely election. Something seems off about this so I wanted further opinions.

[Lion]

He can be in the business of trading by meeting the IRS requirements. Then he uses Schedule C and Schedule D. If he wants to make the mark-to-market election, he has to meet those requirements. Then he uses Schedule C and Form 4797.

https://www.irs.gov/taxtopics/tc429

[ATSMAN]

Yes thank you for the advice. Luckily I still work with a CPA, who has been able to help me out whenever I get in over my head. So your previous client was a day trader who basically became a dealer? He was middling stocks?

I have lost contact with this former client but he was a sharp fellow! I am sure he is doing well with the market up 70%! I do ask a new prospect if they are day traders because I may not be the right choice to prepare their returns.