Since we have to live with our current tax system flaws and all, it’s a good time for traders to become familiar with the basic IRS tax forms as well as day trading tax rules that will make up their federal tax return. But unless you’re a closet tax geek, it’s unwise to implement tax strategies on your own; one false move can cost you plenty, possibly even your trader tax status.

We strongly recommend you seek tax strategies and solutions from the trader tax professionals at Traders Accounting this tax season. We know the day trading tax rules and we’ll help you prepare an audit-proof tax return that cuts your tax bill to the absolute minimum. Think of it as your own personal tax reform!

Day Trading Tax Rules: Election of Mark-to-Market Accounting

For most traders, election of the mark-to-market (MTM) accounting method is among the most important documents they will file with the IRS. Why? Because MTM enables traders to use tax strategies and solutions to change the tax status of their earnings from capital gains/losses to ordinary income/losses, thereby avoiding the $3,000 capital loss limitation and the wash sale rule.

But there’s a catch: You must enclose a statement of intent to use MTM with your tax return or extension request by the appropriate tax deadline (March 15 or April 15) the year prior to beginning MTM accounting. For example, to use MTM on your 2007 return this spring, you would have to have elected mark-to-market by April 15^th of last year.

The one exception: if you’re filing as a new business entity (partnership, limited liability company or C corporation), you have two months from opening to note your accounting preference in your meeting minutes. You need not notify the IRS until the next tax deadline.

IRS Tax Form 3115: Application for Change in Accounting Methods

Your first year using MTM, you will file IRS Tax Form 3115 (Application for Change in Accounting Methods) and submit it with your tax return. This form contains a one-time adjustment, Section 481(a), which captures duplications and omissions resulting from the change in accounting methods. If the adjustment is $25,000 or less, you may deduct the full amount on your return; if it exceeds $25,000, you may deduct 25% each year for the next four years.

Schedule C: Profit or Loss from Business

If you file as a sole proprietor and do not elect mark-to-market accounting, you will follow this day trading tax rule: report your expenses on Schedule C (Profit or Loss from Business) and your trades on Schedule D (Capital Gains and Losses). If this seems somewhat incongruous, it is; the IRS considers it suspicious, too.

Tax strategies and solutions to avoid raising this possible red flag with the taxman is to trade under a formal business entity (limited partnership, LLC or C corporation). Tax treatment of business entities is both more favorable and more routine, and hence less suspect, to the IRS.

Schedule D: Capital Gains and Losses

Traders in stocks, options and single-stock futures who do not elect mark-to-market accounting report their trading activity on IRS Tax Form Schedule D (Capital Gains and Losses).

Schedule D contains two parts: short-term capital gains/losses for assets held less than one year, and long-term capital gains/losses for assets held more than one year. This also is the form on which wash sale adjustments are recorded.

Because day trading activity often involves buys and sells of unequal shares, the tax rules state calculations of gain or loss must be broken down into the smallest number of shares on either the buy or sell side, which can be a time-consuming and tedious process.

If your trading activity is significant enough to warrant day trader tax status, chances are Schedule D rules will appear  overwhelmingly difficult to complete without the tax strategies and solutions offered from experienced trader tax professional. Traders Accounting can help simplify your record keeping and streamline your Schedule D preparation.

IRS Tax Form 4797: Sales of Business Property

Traders in stocks, options and single-stock futures who elect mark-to-market accounting report their trading activity on Form 4797 (Sales of Business Property (Also Involuntary Conversions and Recapture Amounts Under Sections 179 and 280F(b)(2)).

Under the mark-to-market accounting method, all securities that you hold at the end of the year are treated as if they were sold and repurchased on the last day of the year; they are “marked to market” for tax purposes. All trading activity should be entered under Section II of Form 4797 (Ordinary Gains and Losses).

Day trading tax rule: long-term investments that are not part of your trading business should be entered on Schedule D and not marked to market on Form 4797.

IRS Tax Form 6781: Gains and Losses from Section 1256 Contracts and Straddles

Traders in commodities, including such Section 1256 contracts as futures, foreign exchange and nonequity options, report their trading activity on Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles). You enter the gross amount of your Section 1256 proceeds from your 1099 on Part 1, Line 2 (Net Gain or Loss) of Section 1 (Contracts Marked to Market).

The day trader tax rules offer commodities traders a break by allowing them to split their Schedule D gains and losses, 60% long-term and 40% short-term. This is such an attractive deal that many commodities traders choose not to elect mark-to-market accounting, thereby retaining their profitable 60/40 split on gains. An added plus from this tax strategy and solution: losses on Form 6781 may be carried back three years against gains.

IRS Tax Form 4868: Application for Automatic Extension of Time

Tax time can be confusing, especially for the first-time active trader. But there is relief in IRS Tax Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return). When filed by April 15, the extension automatically moves your tax deadline three months ahead, to Aug. 15. A second extension, to Oct. 15, affords you a full six months to file, but it is not automatic; you must receive the form marked “granted” back from the IRS.

Bear in mind that this tax strategy and solution only buys you time to file, not pay - if you don’t remit more than 90% of your estimated tax due by the original April 15 deadline, your extension will be deemed invalid.

Take it from experienced traders who know day trading tax rules: don’t go it alone when it comes to filing with the IRS. Call today and get the industry-leading tax strategies and solutions from the professionals at Traders Accounting on your team this tax season. You know trading; we know day trading tax rules. It just makes sense.