Deducting trading expenses?

as soon as you turn it into a "business", you are subjected to self-employment taxes. And more record-keeping. And tax filing/headaches.

Why not put it under cap gains and simplify your life?

Best idea I ever heard for a fulltime trader was, file as unemployed and report your trading activity as cap gains only.
 
Quote from Bolimomo:

- If you establish trading as your business, you can use Schedule C to deduct your business expenses, but use Schedule D to report your gain/loss from trading. Don't report your trading gain/loss as income in Schedule C. Or else IRS will require you to pay self-employment tax. You should be able to write off your trading expenses on Schedule C.
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If you are a MTM trader you report your gain/loss on Form 4797, not Sched D. If you report income on Sched D they will come after you for SE tax.
 
Quote from heech:

Hi all,

I've been trading "full-time", but not really for the last year. I have automated code executing 24/7, and trade about 1000 contracts a month. However, I also have a full time job in a different career.

I've been told by my CPA (who seems competent, but doesn't specialize in trading issues) that trying to treat my trading as a business would not be possible, because the IRS sees my non-trading full time job as proof the trading side of things isn't my "business". This wasn't a major issue before, but trading-related expenses are starting to add up. Considering server hosting, data feeds, software, and other costs... I'm probably looking at ~$10k-$15k in trading-related expenses this year.

Anyone have any input on this issue?
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Your accountant may be correct for two reasons. Your job may be the frirst. This was not an issue until the Tax Court Case of Chen vs. the Comisioner, where the judge ruled (among other things) "if you make more money from your regular job than you do from your trading you do not qualify to file a return as a "Trader in Securities"". This would not be the end, as you could set up an entity, LLC or C Corporation to trade out of and get around that issue, the second issue is that in reading through the lines it appears that you are using an automated trading system that makes your trades. It is problomatic that the IRS would consider you a trader if someone else is doing the trading for you (be it a machine that someone else is programing, or another real human being) If what I think I saw is true you will be an investor unless you are actually pulling the trigger on our trades. Jim Crimmins, Traders Accounting.
 
Jim,

Very much appreciate the insight. I do make significantly more from my regular job... sounds like I'll have to setup some kind of corporate entity (next year?) for this.

I've been contemplating registering as a CPO forsome time, so maybe I'll go after both birds with one stone.

As far as automated trading goes, it's all my own code, my own strategy... me me me. I don't think that will be an issue.
 
Not true. A limited partnership does not pay employment taxes but can still deduct expenses.

Quote from TraderZones:

as soon as you turn it into a "business", you are subjected to self-employment taxes. And more record-keeping. And tax filing/headaches.

Why not put it under cap gains and simplify your life?

Best idea I ever heard for a fulltime trader was, file as unemployed and report your trading activity as cap gains only.
More...
 
MTM status can get very messy. You may have to fight with the IRS to make a distinction as to what account you want treated as MTM and what account you don't. If the OP has some personal investing that is non-retirement it can be a headache. Typically, the IRS will lump all of your non-retirement activity into MTM if you are granted that classification.

Quote from JORGE:

If you are a MTM trader you report your gain/loss on Form 4797, not Sched D. If you report income on Sched D they will come after you for SE tax.
More...
 
At the risk of sounding like a broken record, an LP solves all these problems as well. The OP would be investing in an LP. His activities in that entity would be treated the same as if he were investing in a Hedge Fund. All expenses are fully deductible and no self-employment tax would be incurred. It's the Mother of all Investment-Related Tax Deductions!

Quote from jcrimmins:

Your accountant may be correct for two reasons. Your job may be the frirst. This was not an issue until the Tax Court Case of Chen vs. the Comisioner, where the judge ruled (among other things) "if you make more money from your regular job than you do from your trading you do not qualify to file a return as a "Trader in Securities"". This would not be the end, as you could set up an entity, LLC or C Corporation to trade out of and get around that issue, the second issue is that in reading through the lines it appears that you are using an automated trading system that makes your trades. It is problomatic that the IRS would consider you a trader if someone else is doing the trading for you (be it a machine that someone else is programing, or another real human being) If what I think I saw is true you will be an investor unless you are actually pulling the trigger on our trades. Jim Crimmins, Traders Accounting.
More...
 
Either will work for an active trader, in Texas we prefer our traders to have an LP, while in other states an LLC is probably a better vehicle, as from an asset protection stand point it is a bit easier without the General Partner. But either will work for a trader, as long as you are only trading in the entity there is no payroll tax obligation. Jim Traders Accounting.
 
I have read some of the comments and I am afraid they are all partially correct. You can be classified as a trader if you trade full time and your income ( other than passive income) is from trading then you may be able to file schedule C or D. Should you have multiple sources if income then you can file K1, this is essentially what people who have hedge fund accounts file.
I want to caution you that I am not a CPA and this is my opinion.
 
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