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Corporation/LLC/ETC....Best Trading Vehicle for Taxes
- Thread starter bcavender
- Start date
I'd like to follow up on this thread. I'm planning to quit my job and trade full-time. The instruments that I trade are all Section 1256 contracts.
My trading expenses are relatively low $1500/year for data feeds and about $1000/year for computer hardware.
I will not have a part-time job so all of my income will be from trading. I won't have an ordinary income and assuming that I will not lose:
1) Are there any disadvantages to file as an individual vs as a company besides retirement benefits (401k etc...)?
2) If I file as an individual, all of my income will be from capital gains. Does that mean I would only have to pay 23% (60/40) blended tax rate for my federal return? (Thanks Robert for the calculation). This sounds too good to be true--I'm probably missing something.
Thanks.
My trading expenses are relatively low $1500/year for data feeds and about $1000/year for computer hardware.
I will not have a part-time job so all of my income will be from trading. I won't have an ordinary income and assuming that I will not lose:
1) Are there any disadvantages to file as an individual vs as a company besides retirement benefits (401k etc...)?
2) If I file as an individual, all of my income will be from capital gains. Does that mean I would only have to pay 23% (60/40) blended tax rate for my federal return? (Thanks Robert for the calculation). This sounds too good to be true--I'm probably missing something.
Thanks.
Do member traders trade through entities? Is it common? Is it useful? Is there any reason or benefit to this since member traders already take their gains in the form of earned income?
One benefit might be to take trading assets out of your personal accounts as a protection from collections, personal bankruptcy or lawsuits (not that I'm planning any of the above). However I don't know how bulletproof the single person LLC is in such situations.
A second reason I can think of is to keep business debt and lease payments for the exchange membership off your personal accounts so that the ratios or activity don't look unusual when going for a mortgage.
Does this reasoning seem OK? Anything else to add?
One benefit might be to take trading assets out of your personal accounts as a protection from collections, personal bankruptcy or lawsuits (not that I'm planning any of the above). However I don't know how bulletproof the single person LLC is in such situations.
A second reason I can think of is to keep business debt and lease payments for the exchange membership off your personal accounts so that the ratios or activity don't look unusual when going for a mortgage.
Does this reasoning seem OK? Anything else to add?
As far as I know, if you file as an individual or as an entity, futures traders still get taxed on the blended rate. In one case, it is as capital gains; in the second case, it is as earned income, but the amount of taxes is the same (which I think is what you were getting at).Quote from chinook:
2) If I file as an individual, all of my income will be from capital gains. Does that mean I would only have to pay 23% (60/40) blended tax rate for my federal return? (Thanks Robert for the calculation). This sounds too good to be true--I'm probably missing something.
Thanks.
On second thought, that actually sounds strange because the tax rates are different. Maybe someone could verify if I got that right.
Foremost, if you are found to be engaged in fraud, a business entity won't protect anything. Secondly, banks and financial institutions will probably require you to personally guarantee loans/notes despite their intended use by the corporate entity anyway. Thirdly, I suspect that if you file for bankruptcy, and discovery finds that you've transferred assets prior to that into your company, that those assets may not be protected.Quote from PuffyGums:
One benefit might be to take trading assets out of your personal accounts as a protection from collections, personal bankruptcy or lawsuits (not that I'm planning any of the above). However I don't know how bulletproof the single person LLC is in such situations.
A business entity makes it smoother to engage in aspects of business (duh), makes some programs available to you (like small business owner's health insurance), makes some mundane otherwise non-deductable deductions available to you, opens up more opportunities regarding retirement programs, allows reimbursement/deduction for business related activities - some of which you may enjoy, affords some level of protection against personal liability... if you plan accordingly.
I did some more reading and came up with the following. Again I only trade section 1256 contracts and assuming a profitable year:
1)File 1040 as an individual.
2)Report trading gains and losses on Schedule D and form 6781.
3)Report the allowable deductions associated with the trading business on Schedule C. Line B of Schedule C, use code 5329 for "other financial investment activities" as the business.
3)Schedule C generally doesn't have any income on it because the income is capital gain on Schedule D. The total of trading deductions shows as a loss, which carries to line 12 of Form 1040, reducing the amount of tax paid on trading gains.
Again assuming a profitable year, the only drawback I see is not being able to deduct health insurance premiums and contributing to a retirement plan.
Does anyone file similar to what I outlined above?
Thanks.
1)File 1040 as an individual.
2)Report trading gains and losses on Schedule D and form 6781.
3)Report the allowable deductions associated with the trading business on Schedule C. Line B of Schedule C, use code 5329 for "other financial investment activities" as the business.
3)Schedule C generally doesn't have any income on it because the income is capital gain on Schedule D. The total of trading deductions shows as a loss, which carries to line 12 of Form 1040, reducing the amount of tax paid on trading gains.
Again assuming a profitable year, the only drawback I see is not being able to deduct health insurance premiums and contributing to a retirement plan.
Does anyone file similar to what I outlined above?
Thanks.
I was just over at Interactive Brokers going through the steps of opening a corporate account. When it came to account capabilities, the only options dealt with stocks (cash, margin, options). Whereas individual accounts are capable of all this, futures and more. Why are corporate accounts limited to stocks? Anybody know? I should probably direct this to IB also.
JohnnyK
JohnnyK
Quote from chinook:
Does anyone file similar to what I outlined above?
Yep. You got it, Chinook.
Next steps (depending on how aggressive you want to be taxwise): Hire your spouse. Provide her and her family with (Sch. C deductible) health insurance as an employee benefit. Open an IRA or 401k for her. Put some of her earnings into a spousal IRA for you. (Weigh these benefits against the new FICA expense you'll have and optimize her salary.)
Quote from Foz:
Yep. You got it, Chinook.
Next steps (depending on how aggressive you want to be taxwise): Hire your spouse. Provide her and her family with (Sch. C deductible) health insurance as an employee benefit. Open an IRA or 401k for her. Put some of her earnings into a spousal IRA for you. (Weigh these benefits against the new FICA expense you'll have and optimize her salary.)
Foz,
Thanks for the suggestions. However, you're not able to deduct your own health insurance premiums or contribute to a 401k for yourself, right?
Thanks.