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Investor

As an investor you report all of your transactions on Form 8949 Sales and Other Dispositions of Capital Assets and Schedule D (Form 1040) Capital Gains and Losses. 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. For tax years 2018-2025, investors cannot deduct expenses of producing taxable investment income due to tax reform.

To enter or review information from Form 1099-B for your capital gain or loss transactions:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Investment Income in the Federal Quick Q&A Topics menu to expand, click Gain or loss on the sale of investments to expand, then click Capital gain or loss (Form 1099-B).
  3. Click + Add Form 1099-B to create a new copy of the form or click Edit to review a form already created.
  4. Continue with the interview process to enter all of the appropriate information.

Trader

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:

  • 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.

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 (Form 1040) 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:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Business Income in the Federal Quick Q&A Topics menu to expand, then click Business income or loss from a sole proprietorship.
  3. Click + Add Schedule C to create a new copy of the form or click Edit to review a form already created.
  4. Continue with the interview process to enter all of the appropriate information.

Mark-to-Market Election

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:

  • That you are making an election under section 475(f) of the Internal Revenue Code;
  • The first tax year for which the election is effective; and
  • The trade or business for which you are making the election.

To make this election in the TaxAct program:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Miscellaneous Topics in the Federal Quick Q&A Topics menu to expand, click Additional information for electronic filing to expand, then click E-Filing Notes and Explanations.
  3. Enter your notes in the fields provided, then scroll down and click Continue.
  4. When on the screen titled E-Filing - Election Explanations for Electronic Return, click the info icon for additional information regarding what to include in your Market-to-Market election.
  5. Make your entries, then click Continue.

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.

Related Links

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.


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