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Mark to Market Election

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As many have known, you can only deduct a maximum of $3,000 capital loss per year if you are a “casual investor”. You are further limited by the wash sale rule which disallows the losses. Here are the most common questions we get:

  • I had a significant amount of capital loss – how can I deduct that?
  • I can only deduct $3,000 capital loss a year because I don’t have capital gains to absorb – any strategies?
  • I triggered the wash sale rule where the deductions are disallowed – how can I avoid this?

If the above describes your situation and you are considered a “trader”, a Mark to Market Election (MTM) is a great strategy to effectively deduct your losses. To be considered a trader, you must meet the following criteria:

  1. Your profit must come from daily market movements instead of dividend, interest, and capital appreciation (nature of the assets, holding periods, etc).
  2. Your trading activity must be substantial (frequency and volume).
  3. You must carry on the activity on a continuous and regular basis (time dedicated to the trading activity).

As a trader, you will be able to mark all your holdings to the market value at year-end, that is, deduct capital losses even if they weren’t realized. In addition, you can deduct all losses against your ordinary income. This means that you are no longer limited by the $3,000 capital loss deduction cap and wash sale rule. You can even deduct any expenses related to your trading activities on Schedule C, which further reduces your taxable income.

The deadline to make the MTM election is by the due date of the tax return prior to the year that the election is effective, not including an extension. You also need to change your accounting method by correctly completing form 3115 in the first year under MTM.

We have helped many of our clients in the past and are fluent in the execution of such strategies. Simply reach out to us if you want to learn more about the implication, execution, deadline, and best practice for the MTM election.


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