Do you need a business entity to qualify for trader tax status?

M

mlturrin

Is it absolutely necessary to trade through an entity to qualify for trader tax status? Also are there any downsides in transfering an individual account over to an entity account? For example, will brokerages change your commission or quote rate for the new entity?
 
No to the first questions. read this to see how to qualify. https://www.irs.gov/taxtopics/tc429.html

There are pros and cons to switching to an entity and I won't list them all here. From the broker's point of view as you asked, some of the downsides are that:

-you will incur the expense of creating the entity
-you will incur the expense of maintaining the entity (Some states charge an annual fee, your accountant will charge you a little more)
-you will need to maintain a business checking account in the same name and EIN as the entity that might have a monthly cost and will require some balance
-that market data fees will be professional rates vs non-pro rates
 
trilogic said:
Appears the benefit is you include commission as part of your gain/loss ? What tax status other than that changes ? thanks
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Commission is factored into gains/losses if you are considered a Trader or Investor in the eyes of the IRS. The main benefit of trader status is you get to deduct expenses on Schedule C with no limitations and can take a home office deduction. If you are considered an investor expenses that are deductible need to be itemized and those are subject to limitations and are phased out once your income hits a certain point.
 
commissions is nice, decent sized trader can have a large bill end of year. What is "reasonable" when it comes to home office and what are "other" expenses ? Expense as in connection fees some paid research etc ? thanks
 
rmorse said:
No to the first questions. read this to see how to qualify. https://www.irs.gov/taxtopics/tc429.html

There are pros and cons to switching to an entity and I won't list them all here. From the broker's point of view as you asked, some of the downsides are that:

-you will incur the expense of creating the entity
-you will incur the expense of maintaining the entity (Some states charge an annual fee, your accountant will charge you a little more)
-you will need to maintain a business checking account in the same name and EIN as the entity that might have a monthly cost and will require some balance
-that market data fees will be professional rates vs non-pro rates
More...

All good points, but to me the most significant advantage to status as a "trader in securities" is that no self-employment tax is due on gains. And that can be a big savings.
 
lindq said:
All good points, but to me the most significant advantage to status as a "trader in securities" is that no self-employment tax is due on gains. And that can be a big savings.
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That is correct but you don't pay self-employment tax on trading earning if you trade with or without an LLC or with or without MTM treatment.
 
Thanks Rmorse, this is very helpful. This is the first year I am trading completely through a customer account. I was told by my accountant that I had a choice of being an investor or trader as a business. He thought that I would owe self employment taxes if I treated it as a business, but your publication suggests that is not true.
 
Correct. I'm only comfortable saying this because the IRS has stated it in that link.

"Investment income is not subject to self-employment tax" and if your choose Mark-to-Market Election, "Gains and losses from selling securities from being a trader are not subject to self-employment tax". Since a Single member LLC is treated as as disregarded entity, that should not change for a single member LLC.
 
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