Tax Implications & Record Keeping Flashcards

A Section 475(f) mark-to-market election must be filed by which deadline for it to be effective for the current tax year?

Answer: The due date of the prior year's tax return (including extensions)

The Section 475(f) election must be made by the due date (including extensions) of the tax return for the year prior to the year it is to be effective.

A trader receives dividend income from stocks held in a taxable brokerage account. Qualified dividends are taxed at:

Answer: Long-term capital gains rates

Qualified dividends meeting IRS holding-period requirements are taxed at the same preferential long-term capital gains rates (0%, 15%, or 20%).

Which IRS form is used by brokerage firms to report proceeds from sales of securities to both the trader and the IRS?

Answer: Form 1099-B

Form 1099-B reports proceeds from broker and barter exchange transactions and is used to reconcile sales on Form 8949.

A trader sells a losing position on December 28 and wants to avoid the wash-sale rule while staying economically exposed to the sector. The best approach is to:

Answer: Buy a highly correlated but not substantially identical ETF covering the same sector

Purchasing a similar but not substantially identical security (e.g., a broad sector ETF) avoids triggering the wash-sale rule while maintaining market exposure.

For traders who trade foreign currency (forex) as retail off-exchange contracts, what is the default tax treatment under IRS rules?

Answer: Section 988 ordinary income/loss treatment

Retail off-exchange forex trades are taxed as Section 988 ordinary income or loss by default, though traders may elect out to use Section 1256 treatment.

A trader's brokerage reports an incorrect cost basis on Form 1099-B. The trader should:

Answer: Report the correct basis on Form 8949 using Box B or E with an adjustment code

When broker-reported basis is incorrect, the trader enters the corrected basis on Form 8949, checks the appropriate box, and uses adjustment code 'B' to explain the difference.

Which record should a trader retain to prove the fair market value of a position at year-end when using the mark-to-market (Section 475) accounting method?

Answer: Year-end brokerage account statement or closing price data for December 31

Year-end brokerage statements or closing price data for December 31 document fair market value for each open position required under mark-to-market accounting.