Tax problem with daytrading futures in Roth IRA?

Quote from CoolTrader:Day trading IRA is a wide spread practice in the industry. If it is illegal, all of them should be banned. IRS cannot just pick on the big traders, and let go the smaller ones. You can challenge IRS in court if you become their target.
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IRS (and the Congress) certainly can pick on big taxpayers and not the small ones. It's done every day.

It is not "illegal" to buy and sell in an IRA, so there is no reason to ban it.

What might be construded as "illegal" is not paying your taxes and not filing the apporpriate tax return for the IRA.

The applicable tax form is found here: http://www.irs.gov/pub/irs-pdf/f990t.pdf
 
Michael:

I apologize for leaving you hanging. I thought when I left the matter was resolved to the extent people would just continue to delude themselves into thinking everything is okay.

First off, NO I was NOT audited and NO I was not scared off either.

Here's what happened to me:

My Roth IRA account was set up in 1999 or 2000. The plan was to build the balance up to a substantial amount so I could trade the S&P 500 index in the Roth IRA tax free. Everybody knows there's no taxes from trading profits in the Roth. Right? So I took several futures positions long term and did indeed achieve my goal of amassing enough in the Roth to start to trade by this time the ES instead of Big S&P. Meanwhile I'm trading the hell out of the eminis in 3 separate brokerage accounts and paying the taxes quarterly. Now it's time to start using the excess cash in the Roth for the eminis.

In the meantime, my CPA says you can't get away with making this much money and not doing some tricky stuff. He suggested things like setting up an LLC or having someone else trade FOR me, etc. But the bottom line was it was too much money(trading profits in the 3 regular accounts) to do the same in the Roth.

He told me I could get a private letter ruling that would apply ONLY to me and no one else. For that you need a first class law firm with connections in D.C. to have any chance of success.

I researched everything I could get my hands on. The more I searched and talked to people the worse it seemed because Congress never meant the IRA to be used as a trading vehicle. Sure I've read a lot of rulings but the bottom line is I had to hire a law firm who did extensive research themselves and they told me to forget it. When they got done telling me exactly what I was up against I was only too glad to pay up and abandon the whole deal. I was told I would be accused of not paying my quarterly taxes- this is a criminal matter. Further I was told I would be looking at a 20% penalty for failing to do something (I'd have to get the papers from the safe deposit box) in addition to interest due for years if I went undetected. Bottom line it is not worth taking the chance if you have a great deal to lose.

Then and only then did I abandon the idea of trading ES in the Roth. Now I add contracts to "cover" the difference. Instead of trading 50 lot I trade 65 and it nets out to the 50. The outcome is the same and I am not doing anything that will come back and bite me in the ass. Many days I trade several hundred ES contracts so what's another 50 or so?

As far as having an agenda- no way. In fact I'm sorry I ever got started on this subject because I am a very private person and don't like to share my financial business with people I don't know.

That's why I seldom offer advice anymore. I don't like to argue or have a pissing contest.

I'll reiterate, if you make small gains you'll probably go unnoticed and "get away with it." But if you make money take heed because now more than ever before they are indeed watching you. The news article I read in the last few days claimed the IRS would aggressively audit $100k earners to close tax gap and Bush gave them double their previous budget to get it done. Just how many $100k earners do you think there are anyway?
 
takenoprisoners,

Thank you for the explanation and being sensitive to my concern. I really do not know what to think now.

I had some plans for my retirement and need to re-evaluate before making any decisions. I wish there was a way to verify the stance of the IRS concerning this. Surely your not the only person that has faced this and I can imagine that others have now been audited and did not pre-emptively act as you did.

Fire your CPA...but maybe he was your best friend...I really do not know what to think...

I do not like the idea of the POSSIBILITY of any repercussions that an Audit can bring....

Michael B.
 
Quote from CoolTrader:

Day trading IRA is a wide spread practice in the industry. If it is illegal, all of them should be banned. IRS cannot just pick on the big traders, and let go the smaller ones. You can challenge IRS in court if you become their target.
But based on takenoprisoners' posts in the other thread, he was screwed by IRS and closed his Roth.
http://www.elitetrader.com/vb/showthread.php?s=&threadid=65057&perpage=6&pagenumber=4
I don't know why he didn't file a lawsuit, the amount is too small to justify? That makes me worried, the worst nightmare really happened.
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NO, I made a lot of money in the ROTH betting long on Crude Oil, Gold and others. Long term trades looking at monthly charts. These were trades that lasted for a long time. I just traded enough to be in the correct contract months for my system. That's okay. That's what you're supposed to do. It's called investing. Why should that be illegal?

I closed my Roth because I can make more in a week in the ES with less risk by not holding positions over night.
 
Quote from ElectricSavant:

takenoprisoners,

Thank you for the explanation and being sensitive to my concern. I really do not know what to think now.

I had some plans for my retirement and need to re-evaluate before making any decisions. I wish there was a way to verify the stance of the IRS concerning this. Surely your not the only person that has faced this and I can imagine that others have now been audited and did not pre-emptively act as you did.

Fire your CPA...but maybe he was your best friend...I really do not know what to think...

I do not like the idea of the POSSIBILITY of any repercussions that an Audit can bring....

Michael B.
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Michael:

If there is enough money involved get superb legal council. I recommended the law firm Jones Day because my neighbor works for them. They have offices in 30 countries and 2200 lawyers in the firm. There are plenty of great law firms like them. I'm sure you can locate one in your area.

If they find favorably for you they will give you in writing something the IRS may accept. Again, with the IRS everything is maybe. NO clear cut rules. If the IRS accepts this for you the IRS will tell me I can't depend on it and neither can Vhehn. So what kind of crap is that?

My CPA is my brother-in-law. I trade for him so he's not going to give me bad advice. He teaches accounting at a University.

Imagine trying to trade with uncertain probabilities like that?
 
I will try to link my related question into this thread's intent:

If I own XYZ trading, a sole proprietorship in the business of trading futures full-time in a normal futures account, and my wife, who files her 1040 separately, and has her own futures trading account/platform/data source/computer, happens to look over my shoulder and trade her Roth IRA mirroring my trades, what might the IRS look unfavorably upon? I do NOT claim 'trader status.' My wife has no business profit to pursue, she is merely building her Roth for retirement. She never withdraws, her income never exceeds 100k per year (so she maintains Roth eligibility) and her accounts are totally separate from mine.

What red flags, or grey areas, are there in this case?
 
Quote from GermanTrader:

I will try to link my related question into this thread's intent:

If I own XYZ trading, a sole proprietorship in the business of trading futures full-time in a normal futures account, and my wife, who files her 1040 separately, and has her own futures trading account/platform/data source/computer, happens to look over my shoulder and trade her Roth IRA mirroring my trades, what might the IRS look unfavorably upon? I do NOT claim 'trader status.' My wife has no business profit to pursue, she is merely building her Roth for retirement. She never withdraws, her income never exceeds 100k per year (so she maintains Roth eligibility) and her accounts are totally separate from mine.

What red flags, or grey areas, are there in this case?
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i dont see a problem. the fears that the irs would have a problem with trading an ira were unfounded. since this thread started i have never herard of anyone getting into trouble trading an ira.
 
I would love an update on this topic from anyone with experience.

I have many years worth of Roth contributions to work with and am considering opening a custodial account for futures trading. I only know of one broker (I think it is velocity) that works with this arrangement and would like to learn of others.

Everything I have done with my Roth so far has been with the intent of growing the amount of money in the account. I would look to continue to do the same. I have income I live off of from other sources, will not be using this for daily living expenses ie income and find much of the discussion in that regard as irrelevant.

Thank you
 
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