"Retroactive" Elections
and other information

All the aforementioned election filing deadlines pertain to individual taxpayers who were required to file and who actually did file at least one tax return prior to making the Mark-to-Market election.  For those taxpayers who are filing their first ever tax return, no filing deadlines for a timely mark-to-market election have been established, other than that the election statement (as previously described) be placed in its books and records immediately in the first year and that a copy also be attached to the first original federal income tax return filed.  Typically this pertains to taxpaying entities other than individuals, such as a newly formed corporation or LLC.   Click here for more on this sophisticated option.     Click here to form your entity right away.  

TIP: If you are a trader who timely filed a M2M election and you incurred huge losses in the stock market during 2007, here's a tip - rather than using the resulting Net Operating Loss (NOL) as a 2-year carryback (formerly a 5-year carryback), consider a timely filed NOL election to carry it forward only.  Then convert a portion (or all) of your retirement plans & traditional IRAs to tax-free Roth IRAs, using the NOL carryforward to shelter the taxes currently due on the conversion.  We can prepare the appropriate elections for you to file.  Become a client here to discuss what plan of action is advisable for you.

By doing this your heretofore full taxable retirement plans & traditional IRAs will become non-taxable for income tax purposes. All future year's growth will then be income tax free, where the growth was only income tax deferred before converting to a Roth.

• Net Operating Losses (NOLs) generally can be used to offset other taxable income in prior years and in future years.  Individuals need to decide at the time that they file their form 1040 (if it shows a current year NOL) whether they want to carry forward the loss to offset future taxable income, or to carry the loss back two years or back five years and recoup taxes paid, plus occasionally even some interest on the money! (see discussion below about interest payments). The odds of an audit are much higher when an individual trader's NOL carry back is filed using form 1045 or 1040X.  But if all your ducks are in a row, the result is a refund of taxes paid at your higher tax brackets from 2000 or 1997 for a loss incurred during 2002 (for example).  Or refunded from 2003 for a loss incurred during 2005, as another example
  
  Optionally an election may be filed with a timely filed 2005 form 1040 to carry forward the NOL, rather than going back for refunds.  The odds of audit when taking this approach are far less because there is no manual examination of the forms 1045 and 1040X along with your prior year 1040s.   A trader might decide to carry forward if he was in low tax brackets in prior years, expects to be in higher tax brackets in future years, or if there are significant skeletons in the closet with his prior returns.   There is no sense of potentially opening a can-of-worms looking for a refund of prior year taxes if the prospects of going forward are more advantageous.
  
  Another detriment of carrying back is that on the way back the taxpayer often forfeits many deductions, credits and exemptions that he originally was entitled to, thereby reducing the net benefit of the deductible NOL.
  
  In summary, when an individual trader's tax year 2002 M2M losses are large enough to create a NOL he must first decide whether to carry back or to carry forward the loss.  If he elects to carry back, he must then decide to carry back two years to 2000 or five years to 1997.   In all three of these cases if the year the NOL is carried to does not fully use up the NOL amount, then the remaining unused portion of the NOL is carried forward to be applied year-by-year.
  
  
  Update: On November 20, 2003 House Lawmakers voted to revive the five-year NOL carryback, which was set to expire.
  
  House taxwriters Jerry Weller, R-Ill., Dave Camp, R-Mich., Jim Ramstad, R-Minn., Kevin Brady, R-Texas, Phil English, R-Pa., Scott McInnis, R-Colo., and Philip M. Crane, R-Ill., linked the NOL provision to a recent economic resurgence. 
  
  The refunds that resulted from these NOL carrybacks were used to hire and retain workers and to make capital investments that provided stimulus to the economy," the taxwriters wrote Thomas in a November 17 letter.
  
  Further Update: The five-year NOL carryback has expired. It only applies for net operating losses for taxable years ending during 2001 or 2002.
  
  
  Update: January 2008.   Congress is planning for a five year carryback provision again - for 2007 & 2008.
  
  
  Update: April 2008.   Congress is planning for a four year carryback provision - for 2008 & 2009.
  
  
  
  Interest Payments made by IRS on the NOL refund amount:
  NOLs generally are not entitled to any interest paid on the refunded amount.  There are two situations where interest is paid:
   
• If the NOL processing is delayed so that your refund check is sent out later than what the IRS considers timely (usually three months or so) then the taxpayer is entitled to interest  which can be computed from the date your NOL refund request was received by IRS, or the date the refund check "should" have been mail to you, depending on how the IRS clerk understands the rules.
   
• The IRS, unbelievably, has exceeding poor quality control over this area.  It has been reported anonymous to us by some taxpayers that the IRS has paid substantial interest, retroactively, from the due date of the original tax return from which the refund amount is coming from.
  
  Conscientious taxpayers inform the IRS of the possible error and occasionally the IRS understands and takes back the interest by voiding the original and then reissuing the check.  Other times the IRS appears to be clueless about the concept of when interest is supposed to be paid to a taxpayer.  [Caution - if sending back the original IRS check, many taxpayers find themselves in a deep dark IRS black hole and if takes months or years to get their money.  So an alternative to consider is to cash the IRS check and repay with a personal check]  [Caution #2 - cashing an IRS check for a greater amount than you are entitled to, potentially subjects the taxpayer to penalties and interest on the excess funds deposited.]
  
  Therefore when obtaining a NOL refund, sometimes substantial interest is included, and sometimes a small insignificant amount of interest is included and sometimes interest is not included at all.
  
  
  
  For information on similar problems when the IRS is charging interest, go to this link:
  http://traderstatus.com/IRSinterest.htm
  
  
  
  

Individuals who want to use Mark-to-Market accounting for their trading generally must elect to do so on form 1040 or extension form 4868 no later than April 15^th.  Having missed this date means that you must wait until next year.

But there are some "retroactive" M2M elections that can be useful if made with professional assistance:

• Traders who have an entity newly established¹ at the early part of the year in which the losses were incurred  may have elected M2M under the special rules for 1^st time tax return filers without ever realizing it could benefit them now.
   
• Traders who did not have a large capital loss last year, may not really need M2M in that year and therefore they can elect this year before April 15^th or, if after April 15^th they can form an appropriate new entity to trade through and make a special M2M election immediately upon formation.
   
• Traders who lost trading during the year, but who's losses were merely "paper losses" because they were still holding the positions with significant paper losses in them on December 31 can make a special "retroactive election" to use those losses, if done before April 15 of the following year.
   
• Similarly, traders who bought back securities within 30 days from when they sold them at significant losses in violation of the Wash Sales Rule, may make a special "retroactive election" on those losses, if done before April 15 of the following year.
   
• After the April 15^th deadline this Wash Sales Rule play coupled with a newly established entity may be helpful.
   
• The Wash Sale Rule plays above can be "forced" by making sure you violate the rule by buying back the same securities within 30 days of a sale that resulted in significant tax losses.  Don't let the thirty days pass by without taking appropriate action.

¹ If you own a newly formed entity such as an S-Corp, LLC, Partnership, Joint Venture, Joint Account and Certain Joint Undertakings with a Fellow Trader or Family Member and have never filed an income tax return together, or if other special circumstances apply, then you should contact us to discuss your options regarding a so-called "retroactive" M2M application.   When writing, please answer these questions which might indicate if you qualify for M2M even without a separate entity formed with the Secretary of the State.:

• When, what date, was the brokerage account open?
• When, what date, was the brokerage account funded?
• What name(s) are on the account?
• Are you married? and neither of you have filed for a tax return for the year in question?
• What did you trade? securities/stock options?   futures/commodities?  forex?
• What was the bottom line gain or loss for the year?

A Carryback of IRS Code §1256 Losses to offset Prior IRS Code §1256 Gains, while normally elected with the timely filing of the tax return for the year that the loss was created, may nonetheless be carryied back retroactively in many cases.

This retoractive carryback election applies to Traders as well as to Investors for their IRS Code §1256 Commodities and Futures capital losses.  Generally this must be retroactively elected within the three year statute of limitations for either the loss year and/or the carryback year(s).

Normally the regular carryback election is made by checking Box D on form 6781 on a timely filed Income tax return.

Making the Mark-to-Market Election - Part I 
 

Making the Mark-to-Market Election - Part II 
The Section 481(a) Adjustment