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Own a Trading Business
Tax reduction starts when you understand the Internal Revenue Code, which is actually made up of two tax Codes: a tax Code for businesses and a tax Code for individuals. If you’re running a business, you’re rewarded for your entrepreneurial activities, and encouraged to continue them.
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How the IRS Defines a Trader
From a tax perspective, these traders are very much in business. For example, just like any other business, they are looking for short-term profits and positive monthly cash flow . The challenge for these traders hasn’t been trying to gain more deductions. Instead, it’s been a lack of information from the IRS as to the exact demarcation point between the activities of a trader and the activities of an investor.
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Mark to Market Accounting
One significant feature of being a trader in securities is the ability to elect the Mark-to-Market (“MTM”) method of accounting. The MTM accounting method is not an automatic event for a trader; it is an election that the trader must affirmatively make. Nor is it an election that can be made by an investor. It is only available for a trader.
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Trading Through a C-Corp
A C-corporation brings you many other benefits as well, such as the ability to amortize pre-existing and start-up expenses, depreciate business assets, and maximize allowable write-offs. In fact, corporate deductions are so wide reaching that frankly, if your expense is ordinary and necessary, it’s deductible.
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Mark-to-Market Accounting:
Is It Right for You? - One of the most important decisions you will make as a trader is whether to elect the mark-to-market (MTM) accounting method. Although MTM is only available to traders, not investors, and does offer some significant tax advantages, it is not right for everyone. What makes this decision so important is that once you select MTM, you're stuck with it; there is no going back simply because it would be to your advantage tax-wise to do so.
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Claim and Defend Your Trader Status - Just because you call yourself a securities trader doesn’t make you one in the eyes of the Internal Revenue Service. In fact, Uncle Sam is predisposed to consider you merely an investor, and thus deny you more favorable tax status, unless you meet a number of tests that are frustratingly open to interpretation.
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Investors Have Limited Deductions
Trader Tax - The majority of individuals who, on a part-time basis, buy and sell securities, mutual funds, options, futures, commodities, and other derivatives, file as an investor. Investors are typically people who have a job that provides W-2 income, or they are retired and trade as a hobby.
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Wash Sale Rules for Traders
Generally, the wash sale rule applies to traders the same way it applies to investors. The difference is that traders have a much harder time keeping records relating to wash sales because they engage in so many transactions.
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Using a Legal Entity
As advisors to people who are actively trading in recognized financial markets on Traders Tax. We at Traders Accounting are constantly concerned with several issues. First, we want to make sure our clients pay the absolute minimum amount of tax they lawfully owe. That means we are always interested in making sure the client takes advantage of every deduction that is properly available.
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Frank Chen Filed as a Trader in Securities, Got Audited and Lost
Find out how Frank Chen got audited and lost his case. This is a must read, you would not want to land up in his shoes.
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Minimising the tax burden for full-time traders - CFDs
The IR will always take the view that if ALL your income is from trading or at least a very, very high percentage of it is, then that is the source of your 'income' and as such it should be taxed as 'income' rather than as 'capital gains'. Now it does take some time for them to get to this point if it is actually relevant to you - if they ever do. Perhaps it might depend on how you or your agent present your affairs and even the presentation of your own tax return supporting schedules.
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Don't Be Hung Out to Dry By Wash Sales - The Internal Revenue Service loves to tax capital gains, but they are just as diligent to disallow capital losses that might offset those lucrative cash cows. Case in point: the wash rule.The wash rule prohibits traders and investors from claiming a capital loss if they buy replacement stock 30 days before or after the sale of a security. If you do so, you can't deduct the loss; it is added instead to the basis of your replacement stock for tax purposes.
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