The method for reporting capital gains and losses depends on whether you were an investor, trader in securities, or a trader who made the mark to market election.
As an investor you report all of your transactions on Form 8949 and Schedule D. An investor, who is not a trader, is subject to the capital loss limitation (maximum loss of $3,000 or $1,500 if married filing separately) and wash sale rules. Investors deduct expenses of producing taxable investment income on Schedule A, Line 23 as miscellaneous itemized deductions subject to the 2% of adjusted gross income (AGI) limit. Investment interest expenses can be deducted on Schedule A, Line 14 which flow from Form 4952, but cannot exceed net investment income. This type of investor is not subject to self-employment tax.
To enter or review information from Form 1099-B Proceeds from Broker and Barter Exchange Transactions for your capital gain or loss transactions:
To enter or review expenses of producing taxable investment income on Schedule A Itemized Deductions:
Special rules apply if you are a trader in securities (including day traders), meaning you are in the business of buying and selling securities for your own account. To be engaged in business as a trader in securities, you must meet all of the following conditions:
The following facts and circumstances should be considered in determining if your activity is a securities trading business:
Note: A taxpayer may be a trader in some securities and hold other securities for investment. The special rules for traders do not apply to those securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business.
If you determine you are a trader, your gains and losses are still reported on Form 8949 and Schedule D and are subject to the capital loss limitation and wash sale rules. These gains and losses are not subject to self-employment tax. However, you may report your business expenses on Schedule C Profit or Loss From Business. Also, as a trader, the limit on investment interest expenses does not apply. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss upon disposition of the securities.
Use the navigation steps above to enter your capital gain or loss transactions on Form 1099-B. Use the steps below to enter your expenses on Schedule C:
Some traders make what is called a "Mark to Market" election in order to deduct the full amount of their losses. Neither the limitations on capital losses nor the wash sale rules apply to traders using the mark to market method of accounting. However, if you do this, then the gains and losses from sales of securities are treated as ordinary gains and losses (except for securities held for personal investment, as mentioned above) that must be reported on Form 4797 Sale of Business Property.
In general, the mark-to-market election must be made by the due date (not including extensions) of the tax return for the year prior to the year for which the election becomes effective. The election is made by attaching a statement either to your income tax return or to a request for an extension of time to file your return. The statement should include the following information:
To make this election in the TaxAct program:
Example Election: I hereby make an election pursuant to Section 475(f) of the Internal Revenue Code. This election is first effective for the tax year 2015 for XYZ Business, Inc.
This election will electronically file with the Federal return; however, will not be transmitted to the state agency.
In addition to making the election, you will also be required to file a Form 3115 Application for Change in Accounting Method. If you have made a valid election under section 475(f), the only way to stop using mark to market accounting for securities is to request and receive written permission from the IRS to revoke the election. Non-filing of the Form 3115 will not invalidate a timely and valid election. To request permission to revoke your election under section 475(f), you must file a second Form 3115 and pay a fee.
TaxAct currently allows 40 transactions for Form 4797, Part II for electronic filing. If you have more than 40 transactions, you can still use TaxAct to enter the data, but would need to file a paper return. Add a Sale of Business Property Worksheet in the program with a description of "See Attached" and the summary totals from all transactions. Before mailing to the IRS, attach a supporting document or spreadsheet to the return showing the details of each of the transactions.