Making 475(f) election just for this year?

Question

I suffered losses in the stock market far exceeding the allowable loss deduction of $3000. I was working on an H1-B visa when I faced this loss. I was wondering whether I could elect to use 475(f) only for this year so that I could treat my capital loss as an ordinary loss and reduce my tax bill. I was trading pretty regularly; my broker-provided 8949 runs into several pages.

Answer 1

The quick and dirty summary is basically that you have to be able to make a compelling argument to the IRS that you're trading as a business on short-term swings of the market.

We can't give a definitive answer, and can't even really make an educated guess without a lot more information about how and how often you trade. Though the fact that you want to do it for one year only suggests not.

Here's what the IRS has to say about it

Traders

Special rules apply if you're a trader in securities, in the business of buying and selling securities for your own account. The law considers this to be a business, even though a trader doesn't maintain an inventory and doesn't have customers. To be engaged in business as a trader in securities, you must meet all of the following conditions:

• You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
• Your activity must be substantial; and
• You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a securities trading business:

• Typical holding periods for securities bought and sold;
• The frequency and dollar amount of your trades during the year;
• The extent to which you pursue the activity to produce income for a livelihood; and
• The amount of time you devote to the activity.

Answer 2

To add to Kevin's answer, you must apply to the IRS to be approved for Trader Tax Status (MTM accounting) and it's not easy to get approval.

Per https://greentradertax.com/trader-tax-center/trader-tax-status/how-to-qualify/ , their requirements for TTS are based on trader tax court cases and their vast experience with IRS and state controversy for traders. To qualify, the trader must:

• Trades full time or part time for a good portion of the day, almost every day the markets are open.

• Holding period: Is the most important factor, and in the Endicott court, the IRS said average holding period must be 31 days or less.

• Makes 720 total trades per year (Poppe court) on an annualized basis. About four trades per day, four days per week, 16 trades per week, and 60 trades a month.

• Executes trades on close to four days per week, every week. Around 75% frequency.

• Has proceeds in the millions of dollars per year on equities.

• Spends more than four hours per day…

• Has few to no sporadic lapses in the trading business during the year.

• Has the intention to run a business and make a living.

• Has significant business equipment, education, business services, and a home office.

• Account size: Has a material account size.