Booyah Breakdown: Taxes for Traders II

If you trade futures, commodities or nonequity options, you can't take advantage of that great 60/40 rule. That rule allows gains to be automatically considered 60% long-term and 40% short-term on Schedule D, regardless of the time the security is held. Instead, everything will be taxed at your ordinary federal tax rate, which could be as high as 35%.

Declaring this election takes some serious thought. The IRS requires you make this mark-to-market election at the beginning of the year. So to be able to mark your trades to market in 2007, you need to include a note on your 2006 return and file it by April 17, 2007.

That also means that if you did not make the election on your 2006 return, you can not mark your trades to market this April.

Finally, once you decide to mark-to-market your positions, for all practical purposes there's no turning back. You can't switch back to reporting only your gains and losses when realized next year without getting the IRS' permission. And, no surprise, that's pretty difficult to get. So be sure it's the right thing to do before you take the plunge.

How to Report Gains and Losses

Line B of Schedule C -- Profit or Loss From Business asks for your business code. There isn't a code for traders, so just choose the code for "other financial investment activities," which is 523900.