Vikana and others, If I am mtm, do i have to pay self employment tax? I thought I didn't have to.
tax problems
- Thread starter praetorian2
- Start date
According to all the docs I have, you do NOT have to pay SE tax under the MTM election. If you did pay SE tax, then you would also be eligible to contribute to an additional retirement plan, like a SEP or Keough, which could serve to offset the 15%. You can't have one without the other.
I have not read anything that says the IRS will acknowledge receipt or approval of an MTM election. Technically, you are changing your accounting method. Anyone can make the election but of course the IRS reserves the right to challenge it if your trading patterns are inconsistent with its definition of a "securites trader".
The guideline has 3 categories: Investor, trader and dealer. An investor is any typical retailer who has not made a MTM election. A trader is someone who trades retail and qualifies for the MTM election eg., frequent, consistent and very involved in trading. A dealer is a business who has customers. The key distinuguishing factor is that a trader CANNOT have customers. Dealers are generally subject to the SE tax.
I have not read anything that says the IRS will acknowledge receipt or approval of an MTM election. Technically, you are changing your accounting method. Anyone can make the election but of course the IRS reserves the right to challenge it if your trading patterns are inconsistent with its definition of a "securites trader".
The guideline has 3 categories: Investor, trader and dealer. An investor is any typical retailer who has not made a MTM election. A trader is someone who trades retail and qualifies for the MTM election eg., frequent, consistent and very involved in trading. A dealer is a business who has customers. The key distinuguishing factor is that a trader CANNOT have customers. Dealers are generally subject to the SE tax.
Praetorian2:
for the record I'm not a CPA - just a trader who've talked to my CPA. Also, There is an excellent series of articles by Green (http://www.greentradertax.com) in ActiveTrader Magazine (http:www.activetradermag.com).
My understanding is as follows: Anyone in business for himself must pay self employment. This typically includes consultants, authors, and anyone receiving 1099s etc. The issue is that by using MTM you "officially" declare that you're in the business of trading, hence leave the door open for the local IRS to decide to ding you with self employment. I have been told that the tax code is not clear on this issue and you're dependent on who audits your return.
A CPA friend of mine told me that the IRS currently is reviewing the MTM issue and will issue clearer guidelines. The IRS is also reviewing the PRO LLC shops , since they don't operate as true partnerships: you're responsible for your own losses/gains - in true partnerships everyones interests are pooled like e.g. a law firm. The IRS is considering self-employment (or something equiv) for LLC pro traders.
That's about all I know on the issue. Hope this is of help.
According to an article in Barron's Oct 16, 2000 on Sec 475, under the tax code Cap Gains and Div Income are not considered Self Employment income, therefore are not subject to SE Income tax. This is consistent with several other articles that I have read, but this was the only one I could find in the vast wasteland I call an office.
I have been told that even if you do not claim trader status or elect MTM, you can file a summary of your daytrading results, without including a spreadsheet listing every trade. Anyone know if this is correct? I have six or seven different accounts: futures, options, investment, daytrading, etc etc . Real pain in the butt to put them all together, plus account for every daytrade.
AAA,
I checked JK Lassers tax guide and could not find anything one way or the other saying that you could not do what you are proposing.
What I would offer is that it seems like a risky proposition if you were audited. If your records are destroyed or lost, you are permitted to use a reasonable estimate of basis to calculate gains and losses. Depending on the time you held various securities you may also hurt or help your situation by doing what you propose. The netting process requires LTCG to be applied against LTCL first and the same with STCG and STCL. Additionally, interest income is reported separately and if you have any margin interest you can deduct this against investment income.
I would suggest dropping your info into one or more Excel spreadsheets and then importing them into one of the Tax Cut or Turbo tax packages, which will make life a little easier. It will also provide you with a record in case Uncle Sam comes knocking.
I checked JK Lassers tax guide and could not find anything one way or the other saying that you could not do what you are proposing.
What I would offer is that it seems like a risky proposition if you were audited. If your records are destroyed or lost, you are permitted to use a reasonable estimate of basis to calculate gains and losses. Depending on the time you held various securities you may also hurt or help your situation by doing what you propose. The netting process requires LTCG to be applied against LTCL first and the same with STCG and STCL. Additionally, interest income is reported separately and if you have any margin interest you can deduct this against investment income.
I would suggest dropping your info into one or more Excel spreadsheets and then importing them into one of the Tax Cut or Turbo tax packages, which will make life a little easier. It will also provide you with a record in case Uncle Sam comes knocking.
trdrmac,
Well, I have all the records, I just don't have all the daytrades in the Sched D format. I know I can download them etc, but I have some computer issues that make that a real nuisance for the near future. What I would do is just attach a summary of all the daytrades , with a spreadsheet listing all the long term trades, etc. Maybe I'll get my computer issues fixed by tax time and do it by the book.
Well, I have all the records, I just don't have all the daytrades in the Sched D format. I know I can download them etc, but I have some computer issues that make that a real nuisance for the near future. What I would do is just attach a summary of all the daytrades , with a spreadsheet listing all the long term trades, etc. Maybe I'll get my computer issues fixed by tax time and do it by the book.
Providing the supporting detail would be your best bet. Here is a brief solution, and feel free to email me if you want to toss any ideas or ask any questions. For the record, I did pass the CPA a few years back, but am not a practicing CPA or accountant. So any opinions are gleaned from what I remember and what I can research. With that said.
If you had 25000 in your trading account on Jan 1 2001.
As of December 31, 2001 you had 75,000. Well assume you had a much better year than I
. You could Report that as 1 trade on Schedule D with a short them gain of let's say $48000. And I would list the asset description day trades.
If you had 2000 in interest income that would be reported on schedule B. Now comes the question of margin interest which is listed on schedule A. That (I may have to think through this) should be added back to the selling price of your trades and then deducted against investment income.
In the above example if your account Value at 31 dec was 75000, and you had 2000 in Margin interest, that would mean that you actually sold 2000$ more in securities and the broker deducted your margin interest from your account value, hence the adding back.
Hope this helps, off to the girlfriend's mom's for dinner
, but I may be back tonight or tomorrow depending on how dinner goes.
Have a safe holiday.
If you had 25000 in your trading account on Jan 1 2001.
As of December 31, 2001 you had 75,000. Well assume you had a much better year than I
. You could Report that as 1 trade on Schedule D with a short them gain of let's say $48000. And I would list the asset description day trades.If you had 2000 in interest income that would be reported on schedule B. Now comes the question of margin interest which is listed on schedule A. That (I may have to think through this) should be added back to the selling price of your trades and then deducted against investment income.
In the above example if your account Value at 31 dec was 75000, and you had 2000 in Margin interest, that would mean that you actually sold 2000$ more in securities and the broker deducted your margin interest from your account value, hence the adding back.
Hope this helps, off to the girlfriend's mom's for dinner
, but I may be back tonight or tomorrow depending on how dinner goes.Have a safe holiday.
That's what I think also rob, I just need to talk to a pro first to make sure. My dad is having me talk to someone the family knows. He says that I don't want to be mtm for some reason.