Long-Term Gains & the MTM Election

If you have substantial long-term capital gains ("LTCG") in one or several stocks and you are considering the Mark to Market election, you should consider these options.

If you have stock from a previous employer, or gifted to you by a grandparent, or you have simply held for a number of years for various reasons, and that stock has a substantial gain, if you make the MTM election and include that in your MTM trading account, that long-term gain will be taxed at ordinary income rates which can substantially increase your first year tax liability, unless you have substantial other trading losses that outweigh the gain.

For instance, you own stock with a $450,000 long-term gain and you make the MTM election. That gain will be included in your Sec 481(a) adjustment and taxed at ordinary income rates. So, ignoring the Net Investment Income Tax of 3.8%, the difference between the 20% long-term capital gain rate of 20% versus your ordinary income rate of 35% (estimate) would translate into an increased tax liability of $67,500.

So, what you should consider is opening two or more accounts with your broker. They can both have your social security number or on can have your SSN and the other a Taxpayer Identification Number, in the case of an LLC opened for trading. This is completely permissible under IRS rules and regulations.

Place the unrealized LTCG security/securities in the investment account and actively trade in the other account. Gains and losses from the investment account are reported on Schedule D/Form 8949 of Form 1040 and the trading account gains and losses are reported on either Schedule D/Form 8949 (without a MTM election) or on Form 4797 (with a MTM election).

In fact, you can have multiple MTM accounts with the same broker or multiple brokers. I have never been a fan of multiple brokerages for traders since it is my humble opinion that as a trader you are in this business to make money. Trading on multiple platforms seems to be inefficient since every platform these days has a learning curve ... unless you spread your trading around for SIPC protection. But, there are arguments both ways and I do quite a few MTM trader tax returns with 4-5 separate brokerages.