Option trader tax status

I'm in NJ. I traded 1256 contracts exclusively. I formed an entity this year to deduct expenses that are reasonable, ordinary and necessary. It doesn't matter that all of my wife and my trading income is done within the entity. Just so long as enough trading is done in there to justify the deductions that we take.
I am not a tax professional but would venture that the answer to your question is "yes" but that you could still file jointly.
I formed the entity to avoid IRS scrutiny.
 
tman said:
I'm in NJ. I traded 1256 contracts exclusively. I formed an entity this year to deduct expenses that are reasonable, ordinary and necessary. It doesn't matter that all of my wife and my trading income is done within the entity. Just so long as enough trading is done in there to justify the deductions that we take.
I am not a tax professional but would venture that the answer to your question is "yes" but that you could still file jointly.
I formed the entity to avoid IRS scrutiny.
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This is the format many of my customers have chosen. If you are only trading 1256 contracts, I'm not aware of any benefit to also looking for TTS from the IRS.
 
joezapp said:
I doubt he'll look.
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Oh yee of little faith. I did look, and provided a response. I don't mind sharing information here on this board especially when someone else has to gone to the trouble of researching the issue as Overnight did. For those who don't understand SFPs and Binary Options I hope my response shed some light on the former. Still not sure I fully understand binary options and how they work. I suppose the folks at NADEX could enlighten me.

Best
 
joezapp said:
... would I have no choice but to file "married filing separate" in order to do that?
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Not sure how YOU would file. Tax returns are like snowflakes, no two alike.

My wife and I, both retired from previous careers, each have a single entity LLC. I have one, she has one. I am an options trader with TTS, she owns a small one person travel agency in which she arranges travel and tours for folks who want to travel to Ireland (she's from Galway.) Our accountant, who is both a CPA and Tax Attorney says that according to IRS;

For Multiple Businesses
If you have separate business activities and they both meet the qualifications for a home-office deduction, you must file a separate Form 8829 for each activity. If you use a separate office space for each activity, simply figure out the percentage of your home that each space takes up, and use those figures when calculating your deductions on the forms. If you use the same space for both activities, you can split the deduction between the two activities.

For Multiple Users
If you and another person both use the same home office space for qualified business activities, you should split the deduction between the two of you. When splitting the deduction, you should consider factors such as how much time each person uses the space and how much of the space is dedicated to each person's equipment and storage.

So when our CPA does our taxes he prepares;

*two Schedule Cs one for each of our businesses [Schedule C, Profit or Loss From Business (Sole Proprietorship)],
*two Form 8829s [Expenses for Business Use of Your Home] (we split the expenses),
*one Form 6781 [Gains and Losses From Section 1256 Contracts and Straddles] and;
*two Form 1099-Rs [Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, etc.]
*one Form 1040 [U.S. Individual Income Tax Return]. We file jointly and for Line 12 he files both Schedule Cs.

So far that has worked. We pay the taxes due, the CPA gets a fee, we're happy, he's happy, we've not been challended since 2013, and the IRS is....(add your own description of the IRS ______________________________________.)

Best

For more information see:

Tax Topic 429 - Traders in Securities (Information for Form 1040 Filers) https://www.irs.gov/taxtopics/tc429.html

https://www.irs.gov/businesses/smal...yed/single-member-limited-liability-companies

https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-
asked-tax-questions-answers/small-business-self-employed-other-business/entities/entities

Expenses for Business Use of Your Home https://www.irs.gov/pub/irs-pdf/f8829.pdf

Profit or Loss From Business (Sole Proprietorship) https://www.irs.gov/pub/irs-pdf/f1040sc.pdf

Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, etc. https://www.irs.gov/pub/irs-pdf/f1099r.pdf

Also see;

6 U.S.C. United States Code Title 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter P - Capital Gains and Losses
PART IV - SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
Sec. 1256 - Section 1256 contracts marked to market
From the U.S. Government Printing Office, www.gpo.gov
https://www.gpo.gov/fdsys/granule/U...tle26-subtitleA-chap1-subchapP-partIV-sec1256
 
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joezapp said:
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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I see no reason why you couldn't do that but it does not seem optimal. For example, you might have to split expenses across both accounts, and so some percentage of the business expenses evaporate.
 
sprstpd said:
I see no reason why you couldn't do that but it does not seem optimal. For example, you might have to split expenses across both accounts, and so some percentage of the business expenses evaporate.
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Good point. I was thinking more in terms of the tax benefit in a year of large capital losses, but good point.
 
Several questions:

1. If trading is considered a business, the gains are considered earned income and are subjected to SS and Medicare taxes?

2. The advantage of deduction of business expenses must be greater than SS and Medicare taxes to make it worthwhile?

3. And if sometimes your holdings/trades are over 12 months (i.e., covered calls with underlying being long term holdings and been called away) can you still claim long term capital gains if they are income?

4. If you incorporate, must you then be subjected to 36% corporate tax or can you file under subchapter S?
 
ironchef said:
Several questions:

1. If trading is considered a business, the gains are considered earned income and are subjected to SS and Medicare taxes?

2. The advantage of deduction of business expenses must be greater than SS and Medicare taxes to make it worthwhile?

3. And if sometimes your holdings/trades are over 12 months (i.e., covered calls with underlying being long term holdings and been called away) can you still claim long term capital gains if they are income?

4. If you incorporate, must you then be subjected to 36% corporate tax or can you file under subchapter S?
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1. No. Unless you create a business entity, the gains are considered unearned income and are not subject to SS and Medicare taxes. (This also means you don't have any earned income so you cannot start a retirement plan if you do not create a business entity.)

2. See 1.

3. It is possible to segregate long-term holdings from your daily operations (for example, the trades might be in clearly segregated accounts) such that you gain the benefit of long-term capital gains for your segregated investments.

4. There are different types of business entities you can form. I do not know the ramifications of that decision. I do not have a business entity.
 
ironchef said:
Several questions:

1. If trading is considered a business, the gains are considered earned income and are subjected to SS and Medicare taxes?

2. The advantage of deduction of business expenses must be greater than SS and Medicare taxes to make it worthwhile?

3. And if sometimes your holdings/trades are over 12 months (i.e., covered calls with underlying being long term holdings and been called away) can you still claim long term capital gains if they are income?

4. If you incorporate, must you then be subjected to 36% corporate tax or can you file under subchapter S?
More...

1. Start here;

https://greentradertax.com/trader-tax-center/entity-solutions/

https://greentradertax.com/the-dos-...ading-activities-and-alternative-investments/

2. Then buy Robert Green's book (2017 ed.) and read it;
https://greentradertax.com/shop-guides/greens-trader-tax-guide/
https://greentradertax.com/shop-guides/greens-trader-tax-guide/

3. Finally, hire an accountant who is well versed in securities law/regulations and taxation.

Best
 
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