Sole Proprietorship Trader

[traderstatus]

with little trading expenses, I don't see the need to change to trader status.

I'd figure a deduction, is a deduction why not take it... but if you feel the deductions are so small that you'd just as well forgo them, I'm not sure why you're here asking about filing as a trader??

one issue no one has mentioned is city and state taxes. Investment income is usually NOT taxed so this saves me about 5 or 6%. I would think that trader status EXPOSES me to these taxes.

Ohio State residents are taxed based on Federal AGI. There is no significant difference whether that AGI is comprised of Investment Income, Investor Capital Gains, Trader Capital Gains or Trader M2M Gains. It's all basically the same in Ohio State tax. BUT under Trader Status you'd be allowed an above the AGI line deduction for your expenses.

Ohio also has a Municipal Income Tax on Earned Income that is earned while working within the municipality. Therefore you'd want a rulling on a M2M Trader Status position before electing M2M. But remember that Trader Status is NOT necessarily M2M, and if you were a non-M2M trader you'd have Capital Gains, which by statute are specifically exempt from the Ohio Municipality tax..

Also, should my trading success excede my earned income by a big margin, would this cause a tax issue?

Actually, that would enhance a trader's tax position.

 

[silverware]

Thanks again. So I guess my only issue remaining would be the municipal tax issue. This, I presume by the last post, depends on the community where I live.
What I mean by the last part of my statement about being more successful with trading than "working" is that can the IRS "make you" become a trader at some point?

 

[traderstatus]

IRS has no incentive to force a taxpayer to be reclassified from "Investor" to "Trader." UNLESS the Trader had previosuly been filing as a M2M Trader and then improperly dropped M2M so he could get long-term capital gain treatment on a deemed trading position.