Option trader tax status

joezapp said:
So true. In my case, the vast majority of my trading is writing options. In viewing both checklists below...

  • Typical holding periods for securities bought and sold;
  • The frequency and dollar amount of your trades during the year;
  • The extent to which you pursue the activity to produce income for a livelihood; and
  • The amount of time you devote to the activity.
More...
I trade /ES S&P 500 e-mini options spreads, normally holding the spread 8-48 hours. I trade daily. I trade the weeklys. I keep good records. 4 years ago the IRS questioned my deductions for home expenses and write offs (i.e. computers, data, books, magazines, data acquisition, home office deductions, etc.)

I took 2 years of ThinkorSwim statements (broken down by month) and showed them that I traded daily, hoping to "...profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation." I showed the IRS that I was trading full time, for profit, on a regular (daily) basis, to to produce income for a livelihood, and that I devoted t least 8 hours a day to do so. The date/time stamp on my trades (some early in the morning during the Asian market activities) ) convinced them that I was serious.

That was good enough for the local folks. They saw my daily, or almost daily trades, the profits obtained therein and that I had correctly claimed, as income, (and paid taxes on) the profits. I did all this by the way as a small (1 person) LLC. But was told that one need not be incorporated to be a business. I could have just as well have been a sole proprietor.

Just keep good records. If you trade 1 contract of Apple (AAPL) once a month you're not in this league. If you trade 3-5 /ES contracts on a daily basis then you probbly are. KEEP GOOD RECORDS.


From the IRS' website;

Topic 429 - Traders in Securities (Information for Form 1040 Filers)

Traders

Special rules apply if you're a trader in securities, in the business of buying and selling securities for your own account. The law considers this to be a business, even though a trader doesn't maintain an inventory and doesn't have customers. To be engaged in business as a trader in securities, you must meet all of the following conditions:
  • You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
  • Your activity must be substantial; and
  • You must carry on the activity with continuity and regularity.
The following facts and circumstances should be considered in determining if your activity is a securities trading business:
  • Typical holding periods for securities bought and sold;
  • The frequency and dollar amount of your trades during the year;
  • The extent to which you pursue the activity to produce income for a livelihood; and
  • The amount of time you devote to the activity.
See these publications for more info;
https://www.irs.gov/taxtopics/tc429.html
https://www.irs.gov/publications/p550/index.html
 
Steven Leeds said:
KEEP GOOD RECORDS.
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Steven - what records do you keep that you can't get from your broker statements? (I'm mostly asking cause I don't keep track of any of this outside of performance analysis)
Can't you just download your activity from there in case you get audited?
 
sprstpd said:
If there is a large dollar amount involved (in terms of being able to write off business expenses), you should definitely do a consultation with Green Trader Tax (or similar organization) and see what they think about your situation and whether you qualify for TTS. If it isn't that much of a win for you, then maybe it isn't worth the time and effort.
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It would probably be worth the time and effort in a year of capital loss, as it would then present tax savings in my state. I agree that it's probably not worth my time and effort otherwise. I wouldn't have a lot of business deductions.
 
sysdevel99 said:
Steven - what records do you keep that you can't get from your broker statements? (I'm mostly asking cause I don't keep track of any of this outside of performance analysis)
Can't you just download your activity from there in case you get audited?
More...

Yes, that's basically it. For example here is a sample of my trading for the past few days.

upload_2017-4-4_14-56-7.png


It shows how many trades I made in the past 30 days. What I traded (always the /ES), time and date traded, whether it was an opening or closing trade, the credit received on the open, the debit paid on the close, whether it was Puts or Calls, the type trade (always a Vertical) etc. I redacted my order numbers and account information. I also took a balance sheet which looked like this;

upload_2017-4-4_15-6-15.png


The balance sheet for the same trades shows the same dates, times, and description of each trade, plus fees (CME, NFA, etc.) and commissions, account balance (the latter redacted) etc. I also took my Consolidated Form 1099 tax statement for the tax year as was sent to me by ThinkorSwim.

I took a nice notebook with each page of trades broken down by month. It was a fairly thick notebook when all was said and done but I think it was clear to the examiner that I was (and am) active in the e-Mini S&P 500 options market.

All that seemed to satisfy the IRS. They never asked me about my home office deductions (e.g. computers, data, office space, telephone, etc. This was for tax year 2013. I've not heard from the IRS since.

I highly recommend greenTraderTax https://www.greentradertax.com/ for the book and the advice that Robert Green offers. I buy a copy every year, 2017 is current.

Best

Steven

P.s. This data screenshots above came from the ThinkorSwim platform. Your experience may vary.
 
I remember reading something from the SEC Act of 1933 that futures are not considered securities, and thus could not be treated as such by the IRS. There was a very definite definition in there about it. I apologize that I cannot recall the exact detail.

The reason I bother bringing it up is because your screens show ES, which is a future.

There is also this bit to look at...Not sure if it would help you, or just give you a headache. Sorry. https://www.nfa.futures.org/nfa-com...pliance-issues/security-futures-products.HTML
 
Overnight said:
I remember reading something from the SEC Act of 1933 that futures are not considered securities, and thus could not be treated as such by the IRS. There was a very definite definition in there about it. I apologize that I cannot recall the exact detail.

The reason I bother bringing it up is because your screens show ES, which is a future.

There is also this bit to look at...Not sure if it would help you, or just give you a headache. Sorry. https://www.nfa.futures.org/nfa-com...pliance-issues/security-futures-products.HTML
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I doubt he'll look. He already passed with the examiner!
 
Thank you but you need not worry. You're mixing apples and oranges. E-mini stock index futures and options on futures are a broad based index as defined by the CME, the NFA, and the CFTC..

A Security Futures Product (SFP) is a futures contract based on a security product as such term is defined in the Commodity Exchange Act. Security Futures Products (“SFPs”) include futures contracts based upon a single security (or “stock futures”); futures contracts based upon a narrow-based security index; and, options on any security futures the terms of which are also defined in the Commodity Exchange Act.

E-mini stock index futures and options on futures are, as I said, a broad based index.

A SFP is a contract for the sale or future delivery of a single security or of a narrow-based security index. Generally, a transferable instrument representing an ownership interest in a corporation (equity security or stock) or the debt of a corporation, municipality, or sovereign. Other forms of debt such as mortgages can be converted into securities. Certain derivatives on securities (e.g., options on equity securities and security based swaps) are also considered securities for the purposes of the securities laws. Security futures products are considered to be both securities and futures products. Futures contracts on broad-based securities indexes are not considered securities. The CFTF and the SEC consider a SFP to be both a futures contract and a security and, as such, the entity effecting SFP transactions must be registered both as a futures commission merchant (FCM) with the CFTC and as a broker-dealer with the SEC.

In general, the Commodity Exchange Act defines a narrow-based security index as an index of securities that meets one of the following four requirements (1) it has nine or fewer components; (2) one component comprises more than 30 percent of the index weighting; (3) the five highest weighted components comprise more than 60 percent of the index weighting, or (4) the lowest weighted components comprising in the aggregate 25 percent of the index’s weighting have an aggregate dollar value of average daily volume over a six-month period of less than $50 million ($30 million if there are at least 15 component securities). However, the legal definition in the Commodity Exchange Act contains several exceptions to this provision.

To my knowledge you can trade SFPs on only one exchange and that is OneChicago. https://www.onechicago.com/ OneChicago advertises itself as "The Exchange for Single Stock Futures."

See the following sites for more SFP information;

http://www.finra.org/investors/security-futures-know-your-risks-or-risk-your-future

http://www.cftc.gov/IndustryOversight/ContractsProducts/SecurityFuturesProduct/sfpoverview

https://www.nfa.futures.org/nfa-faqs/compliance-faqs/security-futures-products/index.HTML

https://www.cmegroup.com/rulebook/CME/I/8B/8B.pdf

And just to put you mind at rest you should know that in 1940 the SEC Act of 1933 was amended to change the definition of "security" to mean any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

In other words stocks, futures, options, etc. are securities as defined in Section SEC. 2. (a) of the SECURITIES ACT OF 1933 [AS AMENDED THROUGH P.L. 112-106, APRIL 5, 2012]. But thank you for pointing that out.

Best

P.s. I put SFPs in the same category as Binary Options. NOT something I'll ever trade.
 
I stand corrected! Thanks, Steven, for being so thorough explaining your experience with TTS status, your successful IRS examination, and your research. Very helpful to many of us here!
 
So if I were to decide, especially starting in a year of capital gains losses, to classify my options trading majority under TTS, I had a thought. I options trade for a living. It's my business. I also trade my wife's account just as extensively. My wife is employed. We file jointly. My wife cannot be considered for TTS due to employment. Would I still be able to file "jointly" and classify MY OWN trading in MY account as TTS and use those tax forms, or would I have no choice but to file "married filing separate" in order to do that?
 
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