2004 Instructions for Form 1040 (ALL) - Supreme Law Firm

• The sale or exchange of S corporation securities for your own account. To be en- ing extensions) of the tax return for the year
stock or an interest in a trust held for more gaged in business as a trader in securities: prior to the year for which the election bethan
1 year, which may result in col- • You must seek to profit from daily comes effective. To be effective for 2004,
lectibles gain (28% rate gain). See page market movements in the prices of securi- the election must have been made by
D-7. ties and not from dividends, interest, or April 15, 2004.
• Gain or loss on the disposition of se- capital appreciation.
Starting with the year the election becurities
futures contracts. See Pub. 550. • Your activity must be substantial. comes effective, a trader reports all gains
• Gain on the constructive sale of cer- • You must carry on the activity with and losses from securities held in connectain
appreciated financial positions. See continuity and regularity.
tion with the trading business, including se-
Pub. 550.
curities held at the end of the year, in Part II
• Certain constructive ownership transshould
be considered in determining if your election, see the Instructions for Form
The following facts and circumstances of Form 4797. If you previously made the
actions. Gain in excess of the gain you
would have recognized if you had held a
activity is a business.
4797. For details on making the
financial asset directly during the term of a • Typical holding periods for securities mark-to-market election for 2005, see Pub.
derivative contract must be treated as ordi- bought and sold. 550 or Rev. Proc. 99-17, 1999-1 C.B. 503.
nary income. See section 1260. If any por- • The frequency and dollar amount of You can find Rev. Proc. 99-17 on page 52
tion of the constructive ownership your trades during the year.
of Internal Revenue Bulletin 1999-7 at
transaction was open in any prior year, you • The extent to which you pursue the www.irs.gov/pub/irs-irbs/irb99-07.pdf.
may have to pay interest. See section activity to produce income for a livelihood.
1260(b) for details, including how to figure
If you hold securities for investment,
the interest. Include the interest as an addiactivity.
ords on the day they are acquired (for ex-
• The amount of time you devote to the they must be identified as such in your rectional
tax on Form 1040, line 62. Write
“Section 1260(b) interest” and the amount You are considered an investor, and not
ample, by holding the securities in a
of the interest to the left of line 62. This a trader, if your activity does not meet the
separate brokerage account). Securities
interest is not deductible.
above definition of a business. It does not
held for investment are not marked-to-mar-
matter whether you call yourself a trader or
ket.
• The sale of publicly traded securities,
if you elect to postpone gain by purchasing a “day trader.”
Short Sales
common stock or a partnership interest in a Like an investor, a trader must report
specialized small business investment com- each sale of securities (taking into account
A short sale is a contract to sell property
pany during the 60-day period that began commissions and any other costs of acquirlater
date, you either buy substantially
you borrowed for delivery to a buyer. At a
on the date of the sale. See Pub. 550. ing or disposing of the securities) on
• The sale of qualified securities, held Schedule D or D-1 or on an attached statelender
or deliver property that you held but
identical property and deliver it to the
for at least 3 years, to an employee stock ment containing all the same information
ownership plan or eligible worker-owned for each sale in a similar format. However,
did not want to transfer at the time of the
cooperative, if you elect to postpone gain if a trader previously made the
sale. Usually, your holding period is the
by purchasing qualified replacement prop- mark-to-market election (see below), each
amount of time you actually held the prop-
erty. See Pub. 550.
transaction is reported in Part II of Form
erty eventually delivered to the lender to
4797 instead of Schedules D and D-1. Reclose
the short sale. However, your gain
• Gain or loss from the disposition of
gardless of whether a trader reports his or
when closing a short sale is short term if
stock or other securities in an investment
her gains and losses on Schedules D and
you (a) held substantially identical property
club. See Pub. 550.
D-1 or Form 4797, the gain or loss from the
for 1 year or less on the date of the short
disposition of securities is not taken into
sale or (b) acquired property substantially
Wash Sales
account when figuring net earnings from
identical to the property sold short after the
A wash sale occurs when you sell or otherself-employment
on Schedule SE. See the
short sale but on or before the date you
wise dispose of stock or securities (includ-
Instructions for Schedule SE for an exceping
a contract or option to acquire or sell
close the short sale. If you held substantion
that applies to section 1256 contracts.
tially identical property for more than 1
stock or securities) at a loss and, within 30
year on the date of a short sale, any loss
days before or after the sale or disposition, The limitation on investment interest realized on the short sale is a long-term
you directly or indirectly:
expense that applies to investors does not capital loss, even if the property used to
• Buy substantially identical stock or apply to interest paid or incurred in a trad- close the short sale was held 1 year or less.
securities,
ing business. A trader reports interest ex-
• Acquire substantially identical stock pense and other expenses (excluding Gain or Loss From Options
or securities in a fully taxable trade, or commissions and other costs of acquiring
Report on Schedule D gain or loss from the
or disposing of securities) from a trading
• Enter into a contract or option to ac-
closing or expiration of an option that is not
business on Schedule C (instead of Scheda
section 1256 contract but is a capital asset
quire substantially identical stock or securi- ule A).
ties.
in your hands. If an option you purchased
A trader also may hold securities for in- expired, enter the expiration date in column
You cannot deduct losses from wash
vestment. The rules for investors generally (c) and enter “EXPIRED” in column (d). If
sales unless the loss was incurred in the oran
option that was granted (written) exwill
apply to those securities. Allocate indinary
course of your business as a dealer
terest and other expenses between your pired, enter the expiration date in column
in stock or securities. The basis of the subtrading
business and your investment sestantially
identical property (or contract or
(b) and enter “EXPIRED” in column (e).
curities.
Fill in the other columns as appropriate.
option to acquire such property) is its cost
See Pub. 550 for details.
increased by the disallowed loss. For more Mark-To-Market Election for
details on wash sales, see Pub. 550. Traders Undistributed Capital Gains
Report a wash sale transaction on line 1 A trader may make an election under sec- Include on line 11 the amount from box 1a
or 8. Enter the full amount of the (loss) in tion 475(f) to report all gains and losses of Form 2439. This represents your share of
column (f). Directly below the line on from securities held in connection with a the undistributed long-term capital gains of
which you reported the loss, enter “Wash trading business as ordinary income (or the regulated investment company (includ-
Sale” in column (a), and enter as a positive loss), including securities held at the end of ing a mutual fund) or real estate investment
amount in column (f) the amount of the loss the year. Securities held at the end of the
not allowed.
trust.
year are “marked to market” by treating
them as if they were sold (and reacquired) If there is an amount in box 1b, include
Traders in Securities for fair market value on the last business that amount on line 11 of the Unrecaptured
You are a trader in securities if you are en- day of the year. Generally, the election Section 1250 Gain Worksheet on page D-8
gaged in the business of buying and selling must be made by the due date (not includ- if you complete line 19 of Schedule D.
D-3