Dividends, Capital Loss and LLC

T

t0yland

Hi Everyone,

One of my main strategies is a dividend play. I have recently learned that dividends do not count as capital gains and therefore do not get deducted against capital losses. I was thinking about starting an LLC to try and get around this and gain all the extra tax benefits. However I am not sure if it would actually allow all capitals gains and dividend income to be considered as earned income and therefore be offset by losses.. Does anyone know?

Thanks
 
Quote from t0yland:

Hi Everyone,

One of my main strategies is a dividend play. I have recently learned that dividends do not count as capital gains and therefore do not get deducted against capital losses. I was thinking about starting an LLC to try and get around this and gain all the extra tax benefits. However I am not sure if it would actually allow all capitals gains and dividend income to be considered as earned income and therefore be offset by losses.. Does anyone know?

Thanks
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i think you can offset $3000 per year of income of any kind against capital losses while capital losses offset capital gains dollar for dollar.
 
I am unsure if that is completely true. For example if you have trader tax status your allowed to deduct all your trading business expenses as ordinary tax deductions directly from gross income of any kind, in full, without any limitations.

I also hear that is very risky. What happens if you dont qualify?
Thats why I am asking about a LLC. Do they have the same type of rules? Example: Deduct dividend gains from capital losses...
 
One of the fundamentals of LLC taxation is that all tax items (income, gain, loss, credit, etc.) flow through to the owners, and in so doing, they retain the same character in the hands of the owner as that tax item had in the hands of the LLC. Hence, in your situation, if the LLC had dividend income, it would remain dividend income when it flowed through to you.

So no, you are not going to get a different tax result by setting up a LLC. You do not convert capital gains and/or dividend income to earned income by merely setting up a LLC. You are still going to be confronted with the $3k/year capital loss limitation rule even with the LLC—unless you have made the mark-to-market election.
 
Quote from jwishcamper:

You are still going to be confronted with the $3k/year capital loss limitation rule even with the LLC—unless you have made the mark-to-market election.
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Now another question: I dont qualify for trader status as I am a swing trader and trade about 4 times a week. I am under the impression that with an LLC you do not have to have trader status inorder to elect MTM.

Does anyone know if that is true or not?
 
Hi tOyland—

First point—don’t completely dismiss the possibility that you might still qualify for trader status. One does not have to be a day trader; it is entirely possible for a swing trader to qualify. There are a host of factors taken into account in determining whether one qualifies for trader status, and no one factor by itself is determinative. These factors are fairly summarized in IRS Publication 550, and you should consult one-on-one with your expert tax advisor to determine whether you qualify.

As to your main question, at least one member of the LLC needs to qualify for trader status in his or her own right. It is not necessary that every member so qualify (per the so-called “trading rule”), but at least one member needs to qualify. If it is a single-member LLC, the entity will be disregarded by the IRS, so it is easy to see why that single member would need to meet the qualifications.
 
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