How to file taxes without showing your strategy to you tax accountant ?

[MKTrader]

The CPA never sees your trades when preparing the return. He downloads the net numbers of gains and losses from your broker inc. wash sales. He puts it in a tax program and then walla it ends up in your tax return.

This thread with exceptions is populated by posters who don't actively trade.

I think it's a fair assumption that TS has been "fooled by randomness" if he's indeed made money but actually thinks his accountant can or has any desire to figure out his trading approach.

Even if you have executions, it's dang near impossible to figure out the system behind them unless it's something as stupid simple as "buy every Tuesday at the open and sell at Friday's close." And if you're making money with something that easy, rest assured you're lucky and will mean revert to a losing streak soon.

 

[traderwald]

Did your tax accountant ask you for access to your trade strategies or did someone give you information that your tax accountant will ask you for access to your trade strategies ?

wrbtrader

Hi wrbtrader,

I have not yet discussed with a tax accountant about this so I do not know if they would ask. That is why I am asking the question. I read that in order to classify one as a trader or investor, one of the points to trader classification is that there should be a trade plan. that is why I am wondering about this.

 

[traderwald]

Suddenly the topic makes sense.

Your CPA can't determine your trading strategies from what trades you've taken. Relax.

I want to clarify a little - I more actively started trading a few months ago. Although this info does not effect your response given abov

 

[wrbtrader]

Hi wrbtrader,

I have not yet discussed with a tax accountant about this so I do not know if they would ask. That is why I am asking the question. I read that in order to classify one as a trader or investor, one of the points to trader classification is that there should be a trade plan. that is why I am wondering about this.

Having a trading plan and a trade strategy are two different things. A trade strategy is part of your trading plan.

Look at it like this...a trading plan is like a business plan but to get classified as a trader by your government involves your activity. Assuming you're in the U.S., you can read about the qualification for trader status @ https://greentradertax.com/trader-tax-center/trader-tax-status/how-to-qualify/

Talk with your tax accountant & IRS about those qualifications mentioned at the above link if you want him/her to filed you for trader status.

wrbtrader

 

[S-Trader]

I read that in order to classify one as a trader or investor, one of the points to trader classification is that there should be a trade plan. that is why I am wondering about this.

There seem to be two issues here: (1) you're concerned about qualifying for "trader tax status," and believe that one of the criteria is to have a "trade plan"; and (2) you're wondering if your tax accountant can reverse engineer your "trade plan"/strategy from your brokerage statements. Correct?

If so...

With regard to Item (1) -- to further clarify the requirements for trader tax status, this might be helpful:

https://greentradertax.com/trader-tax-center/trader-tax-status/how-to-qualify/

You might also want to learn more about the Section 475, mark-to-market election:

https://greentradertax.com/trader-tax-center/trader-tax-status/section-475-mtm-accounting/

https://www.thetaxadviser.com/issues/2010/feb/sec475mark-to-marketelection.html

With regard to Item (2):

I am *not* a tax expert/professional, and don't know if your accountant would want to see some evidence that you qualify for trader tax status before he/she treats your taxes accordingly... but I'm definitely skeptical that anyone could reverse engineer your strategy (especially) from simply having access to the brokerage statements that a tax accountant would need to do your taxes properly. Even if they could, then that would lead one to question how proprietary/unique/complex (and profitable, lol!) such a strategy would be... and therefore whether it'd be worth his/her time & effort to attempt that.

If you're concerned about your tax accountant ever demanding to see your actual "trading plan," in addition to your brokerage statements -- I don't see how he/she could justify that based on the requirements for trader tax status that I'm familiar with. My *guess* is that the other criteria -- e.g., trading activity, trading income relative to any other sources, etc. would be more important if your trader tax status is ever required to be proven to either your accountant or the IRS.

 

[DallasCowboysFan]

Would it be illegal to write a check for $5K and 'guess' that you made $25K and figure out the details at the end of the year and do all the minutiae later?

Or, does it have to be done with the same accuracy that every end of year tax return is done?

 

[chart pig]

There seem to be two issues here: (1) you're concerned about qualifying for "trader tax status," and believe that one of the criteria is to have a "trade plan"; and (2) you're wondering if your tax accountant can reverse engineer your "trade plan"/strategy from your brokerage statements. Correct?

If so...

With regard to Item (1) -- to further clarify the requirements for trader tax status, this might be helpful:

https://greentradertax.com/trader-tax-center/trader-tax-status/how-to-qualify/

You might also want to learn more about the Section 475, mark-to-market election:

https://greentradertax.com/trader-tax-center/trader-tax-status/section-475-mtm-accounting/

https://www.thetaxadviser.com/issues/2010/feb/sec475mark-to-marketelection.html

With regard to Item (2):

I am *not* a tax expert/professional, and don't know if your accountant would want to see some evidence that you qualify for trader tax status before he/she treats your taxes accordingly... but I'm definitely skeptical that anyone could reverse engineer your strategy (especially) from simply having access to the brokerage statements that a tax accountant would need to do your taxes properly. Even if they could, then that would lead one to question how proprietary/unique/complex (and profitable, lol!) such a strategy would be... and therefore whether it'd be worth his/her time & effort to attempt that.

If you're concerned about your tax accountant ever demanding to see your actual "trading plan," in addition to your brokerage statements -- I don't see how he/she could justify that based on the requirements for trader tax status that I'm familiar with. My *guess* is that the other criteria -- e.g., trading activity, trading income relative to any other sources, etc. would be more important if your trader tax status is ever required to be proven to either your accountant or the IRS.

^This is the best answer to the original OP. But there IS a case when your accountant and the IRS want to know your strategy, if you are TTS. You can not simply execute trades from your model or automated strategy. The IRS will nail you on that. It sounds like you are trying to hide or cover up something shady. As traders we have a high probability of receiving an audit. **I'm not an accountant** but you seem to be concerned about hiding your 'trading method". The IRS cares. And, if you are trying so hard to keep your trading strategy secret, the SEC will care when they find out your trading system is inside information. All traders here know your question is irrelevant. There are ways to minimize taxes that experienced traders use but I think you are far from that level of trading. (i'm assuming, not being an asshole.)

 

[Sig]

Would it be illegal to write a check for $5K and 'guess' that you made $25K and figure out the details at the end of the year and do all the minutiae later?

Or, does it have to be done with the same accuracy that every end of year tax return is done?

If you're talking about quarterly estimated taxes, you can pay them base on an estimate and if you're short you just pay interest on the amount you were short. If you make all your gains in Q4 and can demonstrate that you can get the payment schedule adjusted to account for that. Or, easier path of all is to simply withhold more this year than your total taxes last year using a company withholding (doesn't have to be your trading company, could be your regular job) and you're safe harbored.

 

[traderwald]

Hi guys,

For the above thread, I had checked with the accountant, and apparently one would need to show all the trades to determine the tax status and then decide how much tax to pay and file the taxes.

I thought it would be sufficient to simply state the P/L to get the tax to be paid.

So how do you do it ? I mean in order to get trader tax status, you do need to show the trades correct ? Do you show or do you have other options to do this ?

 

[Cabin111]

I've had CPAs for over 40 years. Haven't been audited for over 25 years. Do my 1099s add up to what my broker has sent to the IRS?? If yes, then IRS moves on (unless my income is more than $125,000). If so, they will peak a lot closer. They don't want to spend time and money to get a few bucks here or there. They go for the big fish or try and send a message to people. But if your ducks line up in a row, your CPA or the IRS really don't care about how you did it. 1099s are the key. I will add another key to avoid audits. Have your 1099s lined up for several years?? Very little change of an audit. Their computer program will not spit you out...

My latest CPA is a little slow. Good numbers guy, but not business savvy. I had to explain covered calls to him. Now he sees options all the time...But 7 years ago, he had no clue. I was teaching him about options; ACA (Obamacare...How to save $30,000. by keeping my income low). He told me to pull money from my Roth IRAs. I had to explain to him why that was the LAST place to pull from (growing tax free, passed on in an estate, can be passed down and not have to withdraw for 10 years, can't be touched in a bankruptcy). He can do the numbers, my wife and I will do the business.