Edited by Wallcrawler, 13 May 2007 - 05:49 PM.
Question for traders...
Started by
Wallcrawler
, May 13 2007 05:49 PM
8 replies to this topic
#1
Wallcrawler
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Posted 13 May 2007 - 05:49 PM
....in regards to taxes and trading income...
What is the smartest way to go about doing your taxes as a trader?
Appreciate any info that you give... with site links etc.
Thanks, WC
$ No more effort is required to aim high in life, or to demand excellence and success than is required to accept failure and poverty. $ ~ Anonomous
#3
Russ
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Posted 13 May 2007 - 06:05 PM
Singapore and Mexico have 0% tax on capital gains.
Edited by Russ, 13 May 2007 - 06:05 PM.
"Nulla tenaci invia est via" - Latin for "For the tenacious, no road is impossible".
"In order to master the markets, you must first master yourself" ... JP Morgan
"Most people lose money because they cannot admit they are wrong"... Martin Armstrong
http://marketvisions.blogspot.com/
"In order to master the markets, you must first master yourself" ... JP Morgan
"Most people lose money because they cannot admit they are wrong"... Martin Armstrong
http://marketvisions.blogspot.com/
#4
Wallcrawler
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Posted 13 May 2007 - 06:13 PM
Singapore and Mexico have 0% tax on capital gains.
Keep them coming...
Offshore was a route I have been seriously thinking about... I was looking into Costa Rica. Mexico is not one I thought about. I live in Southern California right now.
$ No more effort is required to aim high in life, or to demand excellence and success than is required to accept failure and poverty. $ ~ Anonomous
#5
Iblayz
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Posted 13 May 2007 - 06:41 PM
There are pros and cons for everything. But I favor (and have done it) Mark-to-Market election. With that I am not subject to wash sale rules and profits and losses go to schedule 4797 as ordinary gains and losses......no capital loss limits, and no problems when I sell for a loss and buy back lower within a couple of days....not bound by that wash sale garbage.
MTM converts capital gains and losses to ordinary gains and losses, so there is no limit on the amount of losses that can be deducted (there is a $3,000 limit on capital losses). MTM traders are also exempt from wash sale rules.
See here for info.
And here.
See also info on adopting "trader status" so trading expenses can be deducted as ordinary business expenses.
MTM converts capital gains and losses to ordinary gains and losses, so there is no limit on the amount of losses that can be deducted (there is a $3,000 limit on capital losses). MTM traders are also exempt from wash sale rules.
See here for info.
And here.
See also info on adopting "trader status" so trading expenses can be deducted as ordinary business expenses.
#6
Wallcrawler
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Posted 13 May 2007 - 08:10 PM
There are pros and cons for everything. But I favor (and have done it) Mark-to-Market election. With that I am not subject to wash sale rules and profits and losses go to schedule 4797 as ordinary gains and losses......no capital loss limits, and no problems when I sell for a loss and buy back lower within a couple of days....not bound by that wash sale garbage.
MTM converts capital gains and losses to ordinary gains and losses, so there is no limit on the amount of losses that can be deducted (there is a $3,000 limit on capital losses). MTM traders are also exempt from wash sale rules.
See here for info.
And here.
See also info on adopting "trader status" so trading expenses can be deducted as ordinary business expenses.
Thanks Iblayz - Funny I was reading about that MtoM stuff earlier today... appreciate the links... WC
Edited by Wallcrawler, 13 May 2007 - 08:18 PM.
$ No more effort is required to aim high in life, or to demand excellence and success than is required to accept failure and poverty. $ ~ Anonomous
#7
crestdorf
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Posted 13 May 2007 - 10:09 PM
There are costs as a mark to market "PRO", which if loss carryforwards are not an issue (you are profiting yearly) which is a significantly higher tax rate on ordinary income vs capital gain income. Accounting as a pro is certainly less xpensive. If you make the designation, its hard to go back...you will have to form a different entity/llc. A simple analisis is possible once you are consistant earner. For most, that is the real issue to deal with.
#8
flyers&divers
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Posted 14 May 2007 - 03:12 AM
I would advise traders not to rush into full time trading until they are absolutely certain it will work out because giving up investor status one gives up valuable advantages.
As an investor the gains on futures and futures options get the 60/40 treatment -meaning 60%of gains are taxed LT and 40%at the regular rate.
I f you give up your former occupation and trade full time you have to pay self employment taxes and SS on your gains in addition to paying taxes at the regular rate.
Best to keep a foot in your former occupation and pay employment taxes based on that and be taxed on your trading gains as an investor.
GC
"Successful trading is more about Sun Tzu then Elliott." F&D
#9
Alton
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Posted 14 May 2007 - 12:29 PM
This is another area where I have some knowledge, but I don't qualify for Trader Status, so I don't use it. 
As suggested above, anyone contemplating trading full-time should determine the likelihood of being able to trade sucessfully before you make major financial and life decisions. Contrary to what is implied, you can keep Investor benefits, while also being a full-time Trader.
To reap benefits of Trader Status, you must qualify. Although many consider themselves such, the IRS view is much more restrictive, and there are substantial hurdles to surmount. There is not a specific IRS definition of Trader Status although there are guidelines. Trader Status is being defined by an ongoing process of court cases. A noted author in this area is Ted Tesser.
The clearest route to Trader Status is to trade everyday (multiple trades), spending substantial time in the activity, and relying on it as your income source. There should never be any long term holdings in the trading account, so long term capital gain tax treatment is not an issue. If you do have long-term holdings they should be completely segregated in different accounts from your trading activity. Some experts recommend having Trader Status linked to a separately formed entity (Trading Partnership or Corporation). All of this is so you will be able to keep the benefits of LTCG, dividends, etc. for your investments, but claim expenses specific to Trading activity in the Trader-qualified account.
You must qualify for Trader Status to claim mark-to-market treatment for this activity (which exempts you from the Wash Sale rules). To everyone's consternation, the application must be made on the tax return from the year before status is used (to have MTM status for 2007, the statement requesting 475-related MTM must be included on a 2006 Form 1040 which was filed by April 15, 2007). The "new entity" proponents are able to work around this since the entity being formed didn't exist in the last tax period.
Here is an important aside regarding mark-to market. Individuals who trade 1256 futures contracts qualify for mark-to-market status (and some good tax benefits) on those specific items and report on Form 6781. This instance of MTM is different from the MTM associated with 475 Trader Status.
The question has been raised if you can keep the tax benefits for 1256 contracts in a Trader account. I don't know. You should ask a tax specialist. If applicable you could approximate the cost-benefit involved.
Lastly there is the issue of Social Security tax. If you are an entity and pay yourself a salary from your trading, you will owe social-security tax on that amount. However under any other circumstance, you will not owe social-security tax on your trading income, even if you file on a Schedule C. If you have an advisor who says you owe it, find another advisor.
Alton - 5/14/7
As suggested above, anyone contemplating trading full-time should determine the likelihood of being able to trade sucessfully before you make major financial and life decisions. Contrary to what is implied, you can keep Investor benefits, while also being a full-time Trader.
To reap benefits of Trader Status, you must qualify. Although many consider themselves such, the IRS view is much more restrictive, and there are substantial hurdles to surmount. There is not a specific IRS definition of Trader Status although there are guidelines. Trader Status is being defined by an ongoing process of court cases. A noted author in this area is Ted Tesser.
The clearest route to Trader Status is to trade everyday (multiple trades), spending substantial time in the activity, and relying on it as your income source. There should never be any long term holdings in the trading account, so long term capital gain tax treatment is not an issue. If you do have long-term holdings they should be completely segregated in different accounts from your trading activity. Some experts recommend having Trader Status linked to a separately formed entity (Trading Partnership or Corporation). All of this is so you will be able to keep the benefits of LTCG, dividends, etc. for your investments, but claim expenses specific to Trading activity in the Trader-qualified account.
You must qualify for Trader Status to claim mark-to-market treatment for this activity (which exempts you from the Wash Sale rules). To everyone's consternation, the application must be made on the tax return from the year before status is used (to have MTM status for 2007, the statement requesting 475-related MTM must be included on a 2006 Form 1040 which was filed by April 15, 2007). The "new entity" proponents are able to work around this since the entity being formed didn't exist in the last tax period.
Here is an important aside regarding mark-to market. Individuals who trade 1256 futures contracts qualify for mark-to-market status (and some good tax benefits) on those specific items and report on Form 6781. This instance of MTM is different from the MTM associated with 475 Trader Status.
The question has been raised if you can keep the tax benefits for 1256 contracts in a Trader account. I don't know. You should ask a tax specialist. If applicable you could approximate the cost-benefit involved.
Lastly there is the issue of Social Security tax. If you are an entity and pay yourself a salary from your trading, you will owe social-security tax on that amount. However under any other circumstance, you will not owe social-security tax on your trading income, even if you file on a Schedule C. If you have an advisor who says you owe it, find another advisor.
Alton - 5/14/7
