J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

30.17 Mark-to-Market Election for Traders

A trader in securities may elect to have his gains and losses treated as ordinary gains and losses by making a mark-to-market election. As explained below, it is too late to make an election for 2012. In the absence of an election, gains and losses of a trader are treated as capital gains and losses on Form 8949 andSchedule D.

If the mark-to-market election is made, you report trading gains and losses on closed transactions plus unrealized gains and losses on securities held in your trading business at the end of your taxable year as ordinary gains and losses on Form 4797. Trader profits are not subject to self-employment tax (45.1), whether or not the mark-to-market election is made. The unrealized gain or loss on a security that is reported on Form 4797 increases or reduces the basis of the security. For example, if you report an unrealized gain of $50 on stock with a cost of $100, you increase the basis of the stock to $150. If you later sell the stock for $90, you report a loss of $60 in the year of the sale. The requirement to report unrealized gains and losses at the end of the year and to adjust basis of shares is a change in accounting method that requires you to file Form 3115 with the IRS National Office and report required adjustments; see IRS Publication 550 for details.

Once the mark-to-market election is made, it applies to all future years unless the IRS agrees to a revocation.

Making the election is not proof that you are ...