 Gold Customer
Joined: 2/1/2005
Posts: 51
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Since I am making a living via trading vs W2 income, I had elected Mark to Market with IRS, therefore I have trader status. This provides me with the following
1) no wash rule
2) trading expenses on C instead of A
3) no Schedule D fill out 4797 instead.
I would like to set up a topic with fellow knowledgeable traders that are involved with mark to market, and find out about the best way to go the next step to LLC,C corp,S corp, or combination thereof. I have spoken to quite a few people and attended seminars on the above topic, very few people including most accountants are aware of these trader opportunities.
Hopefully there are a few people out there that can exchange information on this topic.
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Registered User
Joined: 2/21/2005
Posts: 5
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Mark,
You might want to read "The NEW Trader's Tax Solution:
Money-Saving Strategies for the Serious Investor" by Ted Tesser. While a bit dated (2001 I believe), it is full of information you are looking for. There is a wealth of information out there, you just have to look and talk with the right people.
MM
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Gold Customer
Joined: 2/1/2005
Posts: 51
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I would really like to discuss the benefits of LLC, vs C or S corp. Presently as a "trader Status", I must meet the trade often criteria. Under an LLC, or other Corp the requirement is less stringent toward trading frequently, plus a greater legitimacy for auditing or red flag purposes.
At the present, if you speak to 3 knowledgeable people, you get 5 opinions. Some CPA's want you to go to LLC/combo with a C- Corp, and that is paper,record intensive, and expensive to create and maintain.
You did nail it with above statement "dated", and that is what I am going through. The IRS is inventing things as they go along.
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Registered User
Joined: 12/19/2004
Posts: 457
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Have you checked these guys out already?
(removed by moderator)
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Gold Customer
Joined: 2/1/2005
Posts: 51
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Probably have (removed by moderator)
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Registered User
Joined: 1/2/2005
Posts: 47
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I do not understand why you would want to subject yourself to double the social security tax for a self-employed person. You don't have to pay that when using Schedule D. You also eliminate any chance for using lower capital gain rates. Every trade, and investment is short term and subject to the highest income tax rates. I understand you have to have a real office with all the expenses associated with such. I believe in keeping expenses extremely low.
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Gold Customer
Joined: 2/1/2005
Posts: 51
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Ky Trader,
First of all there is
1) NO Social Security Tax with "Trader Status".
2) No Wash Sales Rule.
3) All expenses will go on Schedule C. This will immediately reduce your income. As a trader I have the following expenses.
Software and Data Feed, $200 per month.
General office expenses, are minimal $40 per month.
Seminars - Average $150 per month
Internet - DSL + HotComm ,etc. $85 per month.
None of the above can be expensed via Schedule A.
I have this status for 2 years now, there are some drawbacks and nuances that I need with a corporate umbrella.
Also note: if you trade currency and futures, you still can get 60/40 on cap gains. As long as it is seperate acct.
Regards,
M
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Registered User
Joined: 1/2/2005
Posts: 47
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Have you been audited by the IRS and been approved for not paying Social Security Taxes? Has your CPA been through such an audit? If your just relieing on a CPA's advice, and have not checked out the actual forms you might want to do so. It is my understanding that "Trader Status" (the IRS like you said is making up the rules as they go along) is not defined in the income tax code. It is treated just like any other business. Also other people getting this status in the past have been audited and proved they have a separate office, which you do not indicate you have or you could claim the rent, mortgage payments, electric and phone utilities, equipment purchases, etc. An office is not just part of a room in someone's home. Are you just not reporting your trading business on form SE and hope you can get by without doing that?
For the 2004 year, net profits reported on Schedule C go to to Schedule SE Section A line 2. Unless you didn't make $400 last year and then why trade, line 5 indicates you owe 15.3% of your net profit if you make $87,900 or less per year or 2.9% of line 4 + $10,899.50 if you make more than $87,900 per year (I hope you were in the latter category).
Net income from limited liability companies, limited partnerships, and S corporations are also reported on schedule SE. If you form a C corporation and work for a wage you and the corporation will owe the Social Security and Medicare taxes and the corporation will owe corporate taxes. You might get around the personal taxes by only getting dividends from the C corporation but then corporation will have to pay corporate taxes so the dividends will be subject to double taxation. You will have to issue stock, have a board of directors, etc.
Also the 60/40 rule applies to Schedule D not Schedule C. There is no place for capital gains on Schedule C. Business buys, and sells inventory and are always subject to regular income taxes or corporate taxes (if C corporation), not capital gains. You are establishing you are carrying inventory by the frequency of trades and the necessity of marking your positions to market at the end of the year. That is why they don't care about the wash rule.
People that flip real-estate often find they lose the capital gain rates when they get caught because the IRS classifies their activities as a business not passive real estate investment.
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Gold Customer
Joined: 2/1/2005
Posts: 51
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KyTrader,
Unfortunately everybody has opinions,and they should keep it to themselves. The lack of knowledge is endemic in trading and above all in these chat groups. I indicated earlier, I wanted to speak to knowledgeable people, not someone who has familiarity with a 1040EZ.
Below from Publication 550 IRS.
Mark-to-market election made. If you made the mark-to-market election, you should report all gains and losses from trading as ordinary gains and losses in Part II of Form 4797, instead of as capital gains and losses on Schedule D. In that case, securities held at the end of the year in your business as a trader are marked to market by treating them as if they were sold (and reacquired) for fair market value on the last business day of the year. But do not mark to market any securities you held for investment. Report sales from those securities on Schedule D, not Form 4797.
Expenses. Interest expense and other investment expenses that an investor would deduct on Schedule A (Form 1040) are deducted by a trader on Schedule C (Form 1040), Profit or Loss From Business, if the expenses are from the trading business. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss. The limit on investment interest expense, which applies to investors, does not apply to interest paid or incurred in a trading business.
Self-employment tax. Gains and losses from selling securities as part of a trading business are not subject to self-employment tax. This is true whether the election is made or not.
[Secondly], 60/40 rule applies to 1256 Contracts and refer to form 6781, not schedule D.
Referencing C corp, S corp, LLC, etc.. You have way's to distribute the income, and that would be applicable to the SE, but distribution from gains, isn't applicable to SE.
I think I have wasted enough time, please stick to other threads were perhaps some of your knowledge would be most useful.
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Registered User
Joined: 1/2/2005
Posts: 47
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Your insults are unappreciated. Using insults to defend your opinions, sure indicate to me you don't have confidence in your position. I have never used a 1040EZ form in my entire life and if you knew what you are talking about you would realize that anyone with investment proceeds can't file Form 1040EZ.
As to knowledge, when dealing with taxes, opinions are all we have, yours, mine, CPAs the IRS, etc. Only going through a audit will give you the answers for sure, and that might even include tax court. Maybe you will get a chance to be a test case for all of us. If so, let us know how it comes out.
Most traders don't qualify for any significant deductions because of the office requirement, and this has been my experience. The real advantage is being able deduct expenses for computers, trading platforms, and other big office expenses or being able to depreciate them. I went throught an audit a number of years ago when I tried to deduct equipment expense for my trading on Schedule C. It was all denied and resulted in a real mess in refiling all the federal and state tax forms.
I had not read publication 550 recently. The changes there certainly give me a reason to reconsider trying to claim trading as a business again.
All this confusion just points out how corrupt and broken the current tax system is today. Traders and investors should support the Fair Tax system (consumption tax) being proposed by many today. It eliminates taxing investments and trading. You would only be taxed when you spend the money in your daily living. No one would have to fool with limited liability companines, partnerships, S corporations, C corporations, etc. to avoid taxes.
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Gold Customer
Joined: 2/1/2005
Posts: 51
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I didn't mean to be insulting, but please when you come off spouting your lack of knowledge you are doing an injustice to all the readers of this thread.
If you read carefully my missives, you will note, that I never indicated office expenses. Secondly, the reasons for looking at various corporations, has little to do with avoiding taxes.
Understandably, the1040EZ was an insult, but than to receive your two cents on the 60/40, indicates to me that you don't know what your are talking about.
This is my 3rd year of a trader status, I have not been audited, nor do I fear an audit since I have done the research, and am aware of all the consequences.
The major reasons for a corporate type umbrella is due to providing legitimacy to certain caveat within the legal description of a trader. Read Pub 550 and you will understand. Secondly, with a combo of LLC and C corp I can provide distribution for the business as a trader, plus income which will affect the SE. To offset specific taxes on the distribution the health insurance coverage,401K, trading expenses, seminar travels should take care of some of the problems.
Please if you don't understand the following forms than you should stay with schedule D and A.
K1, 4797, 1256 contracts, form 6781,and 3765 of which you have to dowload from IRS.
It is about that time for me to start trading, my only advice is get educated.
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Registered User
Joined: 3/14/2005
Posts: 64
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As to the issue of LLC Vs C or S Corp I guess it really depends on what you are trying to accomplish with your money and what specific benefits vs cost best fit your income situation. I understand your fustration trying to find resources that discuss strategy. Haven't really found a good book on advanced strategies. Plenty of basic ones. A lot of it depends on how creative you are using the tax code in your situation. I would suggest a conversation with a qualified (experienced) attorney and tax professional to get started on the subject. Dealer status has it good and bad points. The main thing is to make sure you are keeping as high a percentage of the money crossing your table as possible.
You might also want to discuss charitable remainder trusts, non qualified deferred compensations programs and defined benefit plans with your attorney and tax professional.
Again it depends on what you are trying to accomplish with your money
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Registered User
Joined: 1/2/2005
Posts: 47
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You might want to read Profits, Taxes, & LLCs by Holmes F. Crouch. He has also written books on Investor Gains and Losses, and Small C & S Corporations. I am not personally familar with the latter two.
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Gold Customer
Joined: 2/1/2005
Posts: 51
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Kytrader,
Thank you for the info, I will look for the book. The reason that you were audited, is that:
A) the IRS requires you to submit a letter prior to 4/15 of the year you want to be a trader. This letter should have the following:
1) I would like to make an election under section 475  of the Internal Revenue Code, that some of my activities in stock trading will be for business instead of investments.
2) As stated by the IRS code, my first tax year will be effective for 2002.
3) As to the trade or business involved it will be for stock and options trading under various and separate accounts of which I will identify when filing Form 3115.
2)You have to provide a 3115 which is a change in accounting and computation for section 481 (basically to tell them you don't have major losses that you plan to take off of income, as you would carry on with cap losses on Schedule D.
3)You can state to them on the 3115 ( can be much later after 4/15 up to 6 mos I believe) the above, plus I added the seperate accts that I want to be subjected to the trader status.
Be forewarned that as Market to Market, you will no matter what close your trades on Dec 31st. I sometimes will keep them, and have to place in the books that I repurchased as of Jan 2. It is strictly an accounting situation.
Regards,
MarkAB
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