While what you are saying is 100% true and having signature of a CPA on your tax filing substantially reduces the chances of you getting audited...
IRS Trader Status
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While what you are saying is 100% true and having signature of a CPA on your tax filing substantially reduces the chances of you getting audited...
It seems like it has gotten easier with the 2013 'Safe Harbor' IRS tax code. I had said that my CPA advised not to try to write off my home office & expenses, that was 13 years ago when the IRS was going after people taking this deduction. So I stand corrected, the IRS has loosened up some on this but you really need to keep a lot of records- a daily trading log/journal, receipts for everything, and write off only things used strictly for trading. Having a CPA doing your taxes has virtually no bearing on how they choose their audits.
https://cpaorlando.net/home-office-deductions-safe-harbor/
https://cpaorlando.net/home-office-deductions-safe-harbor/
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My personal experience is that CPA's typically have no valuable experience with active option traders and will make more mistakes than I did. My biggest hit was the year that I used a CPA to take over the accounting and what a mess that was! Think about it - how many active option traders are there in the world that use accountants?? The finance world doesn't understand options so why would a CPA?
The choice to use Trader Status helps with write-offs but comes with the requirement that you trade actively on a daily basis. This means you need to buy / sell and generate even more commission for the broker to make sure you meet the qualification. This is counter intuitive for a trend trader that is successful and wants to ride the market for weeks/months to maximize profits and minimize transaction costs.
The bigger issue is separating all your other investments that fit into your "Core" holdings as they wont qualify in the eyes of the IRS. The amount of work to keep everything separate is more time consuming than the market analysis itself. The white wash rules are already overwhelming when you have multiple brokers.
My suggestion is keep your costs to a minimum by trading at home and do your own research to avoid the costly newsletters that add no value. Just file as an investor and focus on the bigger trends and avoid the costly market impact and commission fees.
The choice to use Trader Status helps with write-offs but comes with the requirement that you trade actively on a daily basis. This means you need to buy / sell and generate even more commission for the broker to make sure you meet the qualification. This is counter intuitive for a trend trader that is successful and wants to ride the market for weeks/months to maximize profits and minimize transaction costs.
The bigger issue is separating all your other investments that fit into your "Core" holdings as they wont qualify in the eyes of the IRS. The amount of work to keep everything separate is more time consuming than the market analysis itself. The white wash rules are already overwhelming when you have multiple brokers.
My suggestion is keep your costs to a minimum by trading at home and do your own research to avoid the costly newsletters that add no value. Just file as an investor and focus on the bigger trends and avoid the costly market impact and commission fees.
If you are trading full-time and you are a short term trader, you'll do 720 trades per year regardless. 720 trades becomes a problem if you are trading part time or you are really an investor not a trader, then in both cases you should not be filing TTS anyway...
If you do not form an entity and trade as an individual with trader tax status (with no other income), you CANNOT fund an IRA. Pretty simple.
So as I said, it has everything to do with forming an entity and nothing to do with an individual trader having trader tax status.
You received horrible advice on point #1.
Robert Morse
Sponsor
Not relevant. However if you don't pay estimated taxes and the IRS expects you too, you will be subject to penalty. https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.
Penalty for Underpayment of Estimated Tax
If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.
However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates, and Trusts (or Form 2220, Underpayment of Estimated Tax by Corporations), to see if you owe a penalty for underpaying your estimated tax. Please refer to the Form 1040 Instructions (PDF), Form 1040A Instructions (PDF), or Form 1120 Instructions (PDF), for where to report the estimated tax penalty on your return.
The penalty may also be waived if:
Penalty for Underpayment of Estimated Tax
If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.
However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates, and Trusts (or Form 2220, Underpayment of Estimated Tax by Corporations), to see if you owe a penalty for underpaying your estimated tax. Please refer to the Form 1040 Instructions (PDF), Form 1040A Instructions (PDF), or Form 1120 Instructions (PDF), for where to report the estimated tax penalty on your return.
The penalty may also be waived if:
- The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
- You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.
Shadetree - wrong you are you are. I never got audited in an era when tons of traders got put out of business by the IRS trying to save a few measly dollars. My tax guy was a former IRS auditor and told me what they would be looking for - like daily records accounting for every hour of my day during the year. Like I said - that was before the Safe Harbor which loosened up the trader status. To think you know more than my CPA/former IRS auditor is laughable.
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