Quote from MJ888:
Yes, I am fully aware that setting up a trading entity will cause me to pay additional taxes that I am not paying now. And yes, having a certain amount of verifiable income thru a job is helpful in obtaining other things such as cheaper health insurance and a mortgage.
With all that said, wouldn't it be a good idea to set up a legal trading entity AND have my own separate trading account which will be reported as just capital gains?
First of all, for young healthy individuals, its almost always cheaper to buy insurance directly as an individual than to do it through a business group plan. Because group plans are rated on the health and age of the entire group, typically the people who are less healthy end up benefiting from lower premiums while those who are relatively young and healthy end up paying higher premiums since the unhealthy or older people in the group end up dragging down the entire group.
Second of all, IRS tax code levies taxes based on the source of the revenue... not the status of the entity. With a few exceptions, legal entities are taxed at exactly the same rate as individuals would be. If you trade futures as an individual, you get 60/40 treatment and its not subject to employment tax; if you trade futures as a corporation, you still get 60/40 treatment and its still not subject to employment tax. If you trade equities as an individual, you can count your profits/losses as either capital gains/losses or you can choose to count them as earned income; if you trade securities as a corporation you can count your profits/losses as either capital gains/losses or you can choose to count them as corporate profits (essentially the same as earned income).
As a matter of fact, if you compare the 2009 federal tax rates for corporations compared to the 2009 tax brackets for individuals, you'll see that the brackets for individuals are actually much more advantageous and cheaper than for a corporation.
Now if you're talking about an LLC, its even more of a moot point, because as far as the IRS is concerned, the LLC has no tax liability whatsoever and all gains/losses flow directly through to the members' individual tax return. So in the eyes of the IRS tax code, an LLC is no different than an individual... so almost no tax advantage there (although if you do it right you could certainly get asset protection... but thats a legal issue not a tax issue).
So overall, setting up a legal entity just for trading is almost never cheaper than just filing as an individual... you almost always pay more. The real reason to consider doing it is because the benefits you get are worth the additional expense. If you have trouble getting individual health insurance because of your age or health issues, then it may be worth it, although most group plans need at least 3 employees to start up so even that may not be a good reason unless you have 1 or 2 employees. If you need earned income so you can apply for credit and get mortgages... then it may or may not be worth it... thats a personal call.
The only time I could actually see you paying less in taxes by setting up a legal entity would be if you made enough money that its worth paying yourself earned income, thus paying employment taxes, just so that you could be eligible to contribute to tax deferred retirement plans. In that case, the lower tax rate you'd pay when you retire might justify paying the extra employment taxes on it.
