TRADERS
ADVOCACY: TRADER RELIEF: CAUSE AND MISSION

GTT "virtual lobbying campaign" for "Trader Tax Relief & Corrections"

Cause & Mission

Many traders lost a lot of money the past few years. However, they aren't in a position to receive tax refunds in connection with those losses, because they did not elect mark-to-market accounting (MTM) on time. See our missed MTM page.

Other types of businesses are entitled to use "ordinary loss treatment" as their "default" method of accounting. They never find themselves in the predicament that many traders are in now.

The majority of traders and their accountants never realized they had to elect MTM by April 15th of the current tax year, so they unwittingly must use the default "cash method” of accounting. The "cash method" is inappropriate for securities traders, since trading losses are severely limited for tax purposes – “capital losses" may only offset "capital gains" (not other types of current or prior year income) and net capital losses are limited to $3,000 per year. The "cash method" also requires application of the "wash-sale loss-deferral rules." Since securities traders generate short-term capital gains only (i.e., capital gains on positions held less than a year), they are not eligible to take advantage of the lower tax rate available for long-term capital gains.

Congress tried to make things fair for traders by allowing “ordinary losses” to be deducted against all kinds of income, with no limit, while “capital losses” (losses suffered by non-traders) could only be deducted against capital gains, and only up to $3,000 per year.

However, this “trade-off” failed, because only traders who elected MTM are able to treat their losses as “ordinary.” Traders using the “cash method” of accounting still are limited to an annual capital loss of $3,000, and thus they get the worst of both worlds. All traders should, by default, be allowed to use MTM, as is the law for "dealers." After all, the new MTM tax laws are an extension of IRC Section 475, the mark-to-market rules for "dealers." These rules should be applied to traders.

The mistake was that Congress made traders elect MTM (as opposed to merely granting it to all traders), and set the election deadline too early in the year. They also drafted "transition rules" that were too short. This mistake was compounded by the IRS being too slow in publishing Revenue Procedures to explain the MTM election rules. The IRS also published rules that were too vague and complex.

The mistake is further compounded by the fact that the IRS has never even defined clearly who is a trader in securities in the tax code.

Bad design, bad communication, poor transition rules, widespread ignorance of the rules – all of these contributed to traders missing the boat on MTM, which is what Congress intended all of them to have.

For these reasons, we believe that Congress and the IRS should provide temporary "retroactive" relief to allow all traders (those who qualify as being in the business of trading) to use MTM for all tax years 1999 and later, whether or not they filed a timely and proper MTM election and/or Form 3115 (Change of Accounting Method).

In addition to the good reasons stated above for providing this retroactive relief to use MTM, we ask Congress and the IRS to consider how not doing so would be a great inequity to traders. We ask Congress and the IRS to consider how other "advocacy interest groups" receive special beneficial treatment, which goes far beyond the reasonableness of our request.

We are asking for what Congress intended traders to receive, but was botched in transition and communication. Traders should be able to deduct all their trading losses, just like any business taxpayer can deduct all their losses.

We point out below several special taxpayer interest groups that are allowed to deduct phantom losses that don't exist to evade taxes on income. Congress can pay for our requested trader relief by closing some of these loopholes and beefing up enforcement.

If Congress does not come through (but we think and hope they will), it will be outrageous that traders are forced to go out of business or go bankrupt because they can't deduct their real losses and big business can still get away with murder by evading taxes on real gains with phony losses.

There is another good reason why Congress should provide relief to traders: Traders have been one of the many interest groups victimized by widespread financial scandals and frauds perpetrated by big business, big law, big accounting and big Wall Street firms.

One could argue that traders (and even the American investing public) have been the victims of financial crimes (including fraud, conflicts of interest, insider trading) that caused them to lose money. Traders and investors can argue that some or all of their stock losses were the results of these financial crimes, and that it is more appropriate to classify these losses as "casualty losses" or "business losses" rather than "capital losses." This concept is a stretch and not part of our current specific requests for relief, but we certainly think that distressed investors could seek this relief. Moreover, it would be the right thing for Congress to grant it because investors feel ripped off, and they are paralyzed in selling and buying stocks. This would spur investors to start buying stocks again, something desperately needed by the investment industry and the country in general (because Main Street finances its businesses on Wall Street).

We are not asking Congress to increase the budget deficit to provide relief to traders. Rather, we are asking Congress to finance this relief using the large surplus of taxes paid by traders on the huge gains they made before the bubble burst. Congress also received a huge surplus of taxes during the bull market when employees exercised stock options and paid taxes on ordinary income (the difference between the very low option exercise price and the very high stock price).

Traders need an advocacy group to get needed relief:
Big business, big accounting, big banks and big brokerage firms all have their own powerful lobbies and industry associations fighting for them in Washington on a daily basis. Every time the IRS tries to close one of these business’ "sacred" tax shelters (or "fiscal incentives," as they like to call them), their lobbyists take proactive action and stop the IRS in its tracks. However, when traders need help, there is no one in Washington to be proactive. Our advocacy efforts are the first attempt taken by anyone to be proactive in an attempt to help traders get tax relief. Most traders are "sole proprietors," and they don't have any big lobbying groups fighting for them in Washington. Unions, advocacy groups, PAC and other interest groups are formed in order to combine resources and unify a message to negotiate change.

Traders had a bad reputation in the past, but it turns out that some of the real bad guys were “the pots calling the kettles black.” Countless media stories have depicted traders as "online newbies" who were "untrained," "unprofessional" and/or "undisciplined." Now, however, the real truth is emerging – the Wall Street firms and their in-house traders are not what they purported to be, and instead they benefited from financial impropriety.

Traders, we call on you to get the relief you deserve. Don't be afraid! This relief was given, but mishandled, and you are now the good guys who need help and have already paid for it. Let the bad guys pay for once!

Traders, Congress, the media or any others: If you would like more information or to help us reach our advocacy goals, kindly e-mail us at advocacy@greencompany.com or call (212) 658-9502.
Thank you,
Robert A. Green, CPA