New Prop Trader Structure Question: Uncommon Setup

B

Bourbon84

So I am currently trading a futures prop trading account that is under the name of another trader. He splits 50/50 net P and L with the firm, and he pays me half of that.

I do all the trading but have no downside. I trade about 50 hours a week for this account. I work 30 hours a week doing operations at a hedge fund. I am also a part time student. I trade from a studio loft (so you can't the office is x% of the square footage).

I am making magnitudes more than I anticipated. This generated a few questions:

-What would you consider the best tax structure for this?
-Should I ask him to pay me as an employee or private contractor?
-Am I edible for trader tax status?
-What should I be deducting (30% of rent, internet (%?).


I'll be sitting down with a CPA in a few weeks, but just wanted to get ideas to overall tax strategy. Thanks so much!
 
If you are doing this using futures, ask him to pay you on an IRS 1040, and get copies of the monthly brokerage statements as records for yourself. Whatever the hell you do, try to avoid getting paid on a W-2 and paying taxes on ordinary income for this income from your personal prop deal. I can tell you from personal experience that you can indeed get paid on a W-2 from your "real job", and also claim 1256 blended cap gains and take your itemized business deductions from the expenses you incurred in the course of trading that account as well.

1. Use IRS Form 6781 for Gains and Losses From Section 1256 Contracts and Straddles; those income figures go to:

2. IRS Schedule D ( Form 1040 ) for Capital Gains and Losses.

3. You will most definitely want to itemize deductions like your home office, internet, quotes and charting, hardware, software, your out-of-pocket insurance expenses and medical and maybe some entertainment and lots of shit like that, and then get the advice from your CPA about further smart planning like a SEP-IRA possibly ? Make sure you build out your home office into a real showcase and palace to your sweat equity - treat yourself and take the deductions.
 
Quote from Bourbon84:

bone,

Thanks for the info, that's very useful.
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Try to avoid a K-1 also - the tax treatment is not as good as flowing 1256 gains directly to your individual 1040 return.

And again, yes you will most definitely want to itemize deductions like your home office, internet, quotes and charting, hardware, software, your out-of-pocket insurance expenses and medical and maybe some entertainment and lots of shit like that, and then get the advice from your CPA about further smart planning like a SEP-IRA possibly ?

Make sure you build out your home office into a real showcase and palace to your sweat equity - treat yourself and take the deductions. Get a couple big desks, really nice comfy chairs, real legit workstation PCs with multiple monitors, ECN - Oh, and for God's sake, put a plasma on the wall "for you to monitor the finanicial news channels" ( ahem ). Put something there to relax you that looks great; lots of traders are partial to a nice marine aquarium setup. Maybe hang some nice art if you've really had a good year and that's your thing.

Congratulations, and keep a level head. Grind it out. Hit for average. Stay in the present. Don't quit your "real" job until you just can't stand it any longer and it just is absurd to your CPA that you keep it. Having that 'security' is a real and tangible psychological edge.
 
Haha will do. I am meeting with him and a CPA next week. I have two tradIRAs I have traded from from 4k to 40ish when I was in college. I will consult further on SEP.
 
Quote from Jack_Larkin:

What's stopping you from going direct with the prop firm?
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I think that he is in a fantastic situation. I have two other clients who are hedge fund analysts and they trade a prop deal on the side as well - one lives in Australia, the other used to live in Paris and now he's in NYC. It really is a sweet gig. They are building their HF resumes while simultaneously building their performance metrics trading live markets. Think of it as building their careers using simultaneous and parallel paths.

You have to remember how entrenched the trading staff usually can be at many of these HFs, and how tough the entry barriers are. And within these firms, it can be common practice for the traders to "take" trade ideas from the analysts.
 
Quote from Bourbon84:

So I am currently trading a futures prop trading account that is under the name of another trader. He splits 50/50 net P and L with the firm, and he pays me half of that.

I do all the trading but have no downside. I trade about 50 hours a week for this account. I work 30 hours a week doing operations at a hedge fund. I am also a part time student. I trade from a studio loft (so you can't the office is x% of the square footage).

I am making magnitudes more than I anticipated. This generated a few questions:

-What would you consider the best tax structure for this?
-Should I ask him to pay me as an employee or private contractor?
-Am I edible for trader tax status?
-What should I be deducting (30% of rent, internet (%?).


I'll be sitting down with a CPA in a few weeks, but just wanted to get ideas to overall tax strategy. Thanks so much!
More...

Get an independent contractor agreement and make sure you are not acting as an outside investment adviser. If futures, no CTA registration for under 5 separately-managed accounts.

As an independent contractor, you get paid non-employee compensation reported on a 1099-Misc. If you remain a sole proprietor, report that 1099-Misc. on a Schedule C (profit and loss from business) and deduct your business expenses, including home office. The net Sch C income is subject to SE tax, but you may be over the FICA base of 110k from your job already. The Medicare tax portion of 2.9% is unlimited.

Don't make trades on someone elses account without a formal agreement, that could be illegal and subject you to owing the person for all losses. You need an agreement and should consult an attorney - I am not an attorney.

See our prop trading resources and a separate chapter in my guide on that.

Does your hedge fund allow you to do outside trading for others, or personal trading? Did you sign a non-compete agreement?
 
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