If you are a full time trader, you can make a "Mark-to-Market"
election with the IRS, which changes your accounting method. There are
benefits and drawbacks which each individual needs to determine what's
best for them and their circumstances.
With mark-to-market, you're not limited to a $3,000 capital loss each
year, all your losses can be used. This can be helpful if you have
other sources of income it could offset. There are also expense
benefits. But all income is ordinary, and you give up the long term
15% gain benefit.
Another benefit is not having to mess with keeping track of wash
sales, however, I use software that takes care of all that, and
generates a sch. D, so it's completely painless (except for the cost
of the software that is). I just import all my trades, usually weekly,
sometimes more or less often, and I can see exactly where I stand for
the year. It generates graphs of all sorts, and detail and summary
reports to help you see what you're doing right or wrong. I don't have
a lot of expenses, or losses (knock on wood), so the mark-to-market
election isn't right for me.
Save More Taxes With a Mark-to-Market Election
As a trader, you can also make the special "mark-to-market" election.
If you do, two very important tax benefits come your way.
First, you don't have to worry about the wash sale rule, which defers
the tax loss when you buy the same stock within 30 days before or
after a loss sale. If you make lots of trades, this can happen all the
time. The disallowed wash sale loss gets added to the basis of the
shares that caused the problem. In other words, with the
mark-to-market election you won't have to spend as much time on
bookkeeping as you do researching and trading stocks.
You are also exempt from the $3,000 annual limit on net capital
losses. Why? Because as a mark-to-market trader, all your trading
gains and losses are considered "ordinary," just like garden-variety
business income and expenses. If you have a biblically awful year, you
can deduct your trading losses when you would otherwise be limited to
a mere $3,000 writeoff. The tax savings should ease your pain.
Naturally, there's a price for these goodies. On the last trading day
of the year, you as a mark-to-market trader must pretend to sell your
entire trading portfolio at market and book all the resulting gains
and losses on your return. You then pretend to buy everything back at
the same price. So your stocks start off the new year with basis equal
to market value and no unrealized gains or losses.
Also, you can't take advantage of the 15% long-term capital gains rate
for stocks in your trading portfolio. However, this really isn't a
problem because you shouldn't have anything but short-timers in your
trading stable anyway.