Securities can be identified as investment positions and need not be marked-to-market at year-end and subject to the tax on unrealized gains. This can be used as an effective planning tool, in some cases, to allow a trader to utilize unused carry forward losses and still allow a trader to claim the benefits of Section 475 Mark-to-Market accounting. A trader would still have the ability to have long term capital gains taxable at the lowest capital gains rates available. New traders, without a proven track record, and new entities recently set up for trading should strongly consider making this election. In the current difficult trading and market environment, the election can act as a hedge or insurance policy from a potentially unprofitable year and allow you to apply losses backward or forward against income from a profitable year.
The $3000 limitation on deductible capital losses does not apply. Trading losses are transformed into ordinary income which are fully deductible with no limitation.
Net operating losses can be carried back 2 years to offset prior years’ income and to obtain a refund of taxes paid on income in prior years.
Net operating losses, created by ordinary trading losses, can be carried forward to offset future income.
Deferred losses on wash sales are fully deductible against gains and cumbersome record keeping requirements, related to wash sales, are eliminated.
Easier to segregate and report investment profits (potential long term capital gains) from trading profits by using separate accounts.
The Section 475 Mark-to-Market election changes the accounting method for securities and commodities – IT DOES NOT DETERMINE TRADER STATUS. While a Section 475 election does not determine Trader Status, it is only available to Traders – not Investors. Note the first sentence of Section 475(f) makes it available “[i]n the case of a person who is engaged in a trade or business as a trader in securities and who elects to have this paragraph apply to such trade or business…”