taxes on futures

[PocketChange]

There are two substantial benefits of trading via a company or LLC ...

Investors and allocation of tax liabilities. LLC's specifically allow for foreign and domestic investors and allocation of taxes can be spelled out in the membership agreement.

Indemnification and liability protection. Let me repreat as this is the most important benefit. Indemnification and liability protection.

 

[GermanTrader]

Quote from PocketChange:

There are two substantial benefits of trading via a company or LLC ...

Investors and allocation of tax liabilities. LLC's specifically allow for foreign and domestic investors and allocation of taxes can be spelled out in the membership agreement.

Indemnification and liability protection. Let me repreat as this is the most important benefit. Indemnification and liability protection.

What examples can you make to illustrate the benefit of indemnification and liability protection, when the LLC is an individual?

 

[Pa(b)st Prime]

Exchange members receive the 60/40 blend. However they pay self-employment. Here's ANOTHER nuance though. Only the social security component of self employment is capped at 97k. The Medicare component (I think it's 2.3%) has no cap at all.

Quote from Jachyra:

So let me see if I got this straight, because I am certainly not beyond admitting that I am wrong... are you asserting that exchange members still pay the 60/40 blended rate but are obligated to pay self-employment taxes on ALL of their trading gains (somewhere along the lines of 15.3%) in addition to the 60/40 blended rate of approximately 23%, and that even though they're paying the blended rate its still considered earned income? Perhaps my error was confusing earned income with ordinary income.

If so, is it fair to say that the taxes they pay on their trading gains is somewhere in the neighborhood of 38.3% (15.3 + 23) across the board?

Thank you in advance for your response.

 

[PocketChange]

Quote from GermanTrader:

What examples can you make to illustrate the benefit of indemnification and liability protection, when the LLC is an individual?

A one member LLC makes no difference as your using your own funds in the LLC to defend.

As it relates to investments made by third parties... Additional members etc. Indemnification during these turbulent times provides protection. It's all by statutes in the business corporation act of your state unless expressly stated otherwise in your operating agreement.

 

[Jachyra]

Quote from Pa(b)st Prime:
Exchange members receive the 60/40 blend. However they pay self-employment. Here's ANOTHER nuance though. Only the social security component of self employment is capped at 97k. The Medicare component (I think it's 2.3%) has no cap at all.

Ok, well in that case I officially amend my original post from:

Quote from Jachyra:
...you lose the preferential tax treatment if you ever lease or buy an exchange membership.

to:

...if you ever lease or buy an exchange membership all your gains will be counted as earned income and you'll be obligated to pay self-employment taxes on it.

Hopefully thats a much more accurate statement.

 

[jeb9999]

Quote from Jachyra:

So let me see if I got this straight, because I am certainly not beyond admitting that I am wrong... are you asserting that exchange members still pay the 60/40 blended rate but are obligated to pay self-employment taxes on ALL of their trading gains (somewhere along the lines of 15.3%) in addition to the 60/40 blended rate of approximately 23%, and that even though they're paying the blended rate its still considered earned income? Perhaps my error was confusing earned income with ordinary income.

If so, is it fair to say that the taxes they pay on their trading gains is somewhere in the neighborhood of 38.3% (15.3 + 23) across the board?

Thank you in advance for your response.

Read the IRS code and relevant forms and instructions (Form 6781 and Schedule SE of Form 1040). Section 1256 gives all futures traders 60/40 treatment. Section 1402(i) makes the futures profits of members of futures exchanges subject to FICA tax. Income defined as self-employment income for purposes of section 1402(i) does not redefine the income from its nature as capital gains.

Normal FICA tax rules apply for exchange members. Social Security tax of 6.2% (double for self-employment) is capped at income of $102,000 for 2008. Medicare tax of 1.45% (double for self-employment) has no cap.

Note that only futures profits of futures exchange members is subject to FICA tax, profits from other capital transactions (stocks, bonds, real estate) is not subject to FICA tax.

The tax rules applying to members of futures and options exchanges are very specific and are different from those that apply to members of securities exchanges.

 

[Trader KGB]

While on the subject of 1256, don't forget about the unlimited 3-year carry-back advantage as well:

IRC 1256 contracts also include a capital-loss carry-back feature, but only against IRC 1256 contract gains in the prior three tax years.

Of course, none of us ever want to be in a position to use this feature, but it is nice to know that it is there.

 

[Pa(b)st Prime]

Quote from PocketChange:



Indemnification and liability protection. Let me repreat as this is the most important benefit. Indemnification and liability protection.

As I'm sure you know both can be challenged. Willful negligence ect. In this litigious environment I wouldn't be too cocky about explaining how a super leveraged futures position wasn't questionable conduct on the part of the GP.

 

[Traber]

Thanks for this thread. A lot of info here. This is my 1st year of trading.

I just want to see if my math is correct here.

Single, no kids, Florida - so no state tax.

$10,000 profit trading the YM. it's not this much but for the sake of the number. Tax bracket 25%: from $32,551 to $78,850. Got this number from Wikipedia. http://en.wikipedia.org/wiki/Tax_bracket

$6,000 x .15= $900
$4,000 x .25= $1000

So $1,900 in taxes on $10,000. Nothing more?

the $1,900 will be minus my income tax return or just filed/paid separately?

Also what about joint accounts. Any info on that?

Thanks again

 

[PocketChange]

Quote from Pa(b)st Prime:

As I'm sure you know both can be challenged. Willful negligence ect. In this litigious environment I wouldn't be too cocky about explaining how a super leveraged futures position wasn't questionable conduct on the part of the GP.

Understood... but it is much easier to defend yourself using their money should any dispute arise.