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Part 1 of our explanation of how to make the mark-to-market election.
Many elections under the Internal Revenue Code are as simple as putting a checkmark in the proper box. That isn't the case for the mark-to-market election. In fact, making the election is a royal pain. The following explanation assumes you've already read the preceding pages on mark-to-market accounting and identifying investment holdings.
The IRS chose an unusual deadline for this election. Most elections are due at the end of the year, when you file your return. This election has to be made by the due date — without extensions — for the previous year's tax return. The last day to make the mark-to-market election for the year 2011 is April 18, 2011 (the unextended due date for 2010 tax returns).
I believe the main reason for this is to prevent taxpayers from choosing the election at a time when they already know whether their trading activity will generate a profit or a loss. Many traders would wait until they have a year with significant trading losses, then file the election for that year to avoid the capital loss limitation. Of course you're stuck with the election for all future years once you make it, but until then you get the benefit of capital gain treatment in profitable years without worrying about the capital loss limitation in a year with poor results.
There's a rule that says a "new taxpayer" (a taxpayer for which no federal income tax return was required for the preceding year) can make the mark-to-market election during the first two months and 15 days of the election year. They make the election by recording it in their books and records rather than by filing an election with the IRS. It appears that this rule was designed for newly formed entities (such as corporations and partnerships). Individuals who start trading after April 15 without forming an entity will apparently have to wait until the following year to make the mark-to-market election.
Making the election is a two-step process (with the second step being in two parts). The first step is to file an election, on or before the unextended due date of your tax return for the year before the year to which the election applies. If you file your tax return by the regular due date, attach the election to your tax return. If you file on extension, attach the election to your extension request.
Note: You may read elsewhere (as I have) that this election may be filed by itself. The IRS clearly states that the election must be attached to the return or the extension request.
Note: If you filed early you can still make the election if you act by the due date of your return. File an amended return with the election attached.
Here's what an election would look like, assuming it applies beginning in the year 2011 and that it is filed with the original return or with an amended return filed by the unextended due date:
Make appropriate changes if the form is filed for a different year or if it is attached to Form 4868 instead of Form 1040. IRS guidance doesn't seem to require a separate signature on this statement but I feel more comfortable if the signature is included.
That's all you have to do right now. But you have some special requirements for the following year's return: the return for the first year the election is effective. See the next page for details.
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