You Can Benefit from Your Investment Losses
As the workforce has changed due to the COVID pandemic, so, too, have traditional investment strategies. Many people have had to adjust their investment strategy to account for lost wages, early retirement, or their own businesses closing. If you’re one of the hundreds of thousands of Americans who have invested in futures, mutual funds, securities or “Day Trading”, you may be able to save hundreds of thousands of dollars on your tax return by utilizing a unique accounting method.
What is Mark to Market Accounting?
The Mark to Market (MTM) accounting method allows investors to adjust the value of an asset, security, portfolio, or account to reflect its value as determined by current market conditions rather than the book value. Without a Mark to Market election on their tax return, investors can only deduct $3,000 in capital losses on each tax return. Any disallowed losses or losses beyond the allowable $3,000 cap must be carried over to the next tax year and deducted gradually. However, professional traders who make a mark-to-market (MTM) election can deduct all of their losses, regardless of the dollar amount.
Securities & currencies traders who incur significant losses can deduct all of their losses as a Net Operating Loss on their current year taxes while carrying back losses over the previous years. The CARES Act recently passed by Congress allows investors to carry back five years worth of losses in tax years 2018 – 2020. All gains or losses from MTM will be considered as ordinary gains or losses, instead of capital gains or losses.
How Can You Benefit from MTM Accounting?
In order to benefit from the MTM accounting method for calculating losses and gains, traders must elect MTM on their current year tax filing with their 2020 tax return. They must also change their accounting method to MTM and file it with their tax returns in the years that MTM has been elected. This may require amending previous years tax filings to add the MTM election and designate the losses in those years.
By electing the mark to market accounting method, trading professionals could save hundreds of thousands of dollars in tax liabilities, especially if they have a significant amount of losses in the current tax year. Expenses that can be deducted include wash sale losses, their home office, margin interest, etc. Traders with significant gains should not elect the MTM accounting method as the gains will be calculated as regular income and may put the individual in a higher tax bracket. MTM is a beneficial accounting method but it’s not for everyone. Consult with a professional accountant experienced in mark-to-market accounting to see if you could benefit from this strategy.
For more information on tax breaks for individuals who are self-employed or who’s income is derived from sources other than a full time job…check out our article Accounting for the Self-employed.
Jay Finn, CPA provides tax and accounting services to thousands of businesses, business owners, & individuals. Our specialists are experts in tax law, IRS representation, business accounting, & investment strategies to help you and your business grow financially.