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:
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:
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.