The bad parts of Pro Trading firms

jem,

I think you made the point I was saying. The tax issue can be
complicated and it's best not to go into this issue on a public forum like this for many reasons, including giving the wrong or
confusing information. I gave a list of tax professionals that can answer the questions earlier in the thread. I will list them again for all to see:

Green & Co., Robert Green CPA www.greentradertax.com/

TradersAccounting.com www.tradersaccounting.com/

Mann & Company CPA’s P.C. www.daytradertax.com/


Gene Weissman
Lieber & Weissman Sec., L.L.C.
gweissman@stocktrade.net
 
I'd be interested to know Jem's opinion--I wasn't clear what the Chicago firm told him---do you have to pay SS tax or not?

The IRS web site says no, if you are a professional. Agreed?

The other issue raised about not having a real interest in the LLC
is certainly interesting. I'll run up the bill with my tax lawyer, as my
curiosity has been piqued.
 
as an update that Green guy wrote an article in this months active trader about trading loses. He made an interesting comment about a trader who "actually" risks his own money with an LLC, being able restate or change the reporting made to him by an LLC. The reasoning behind that sentence might be very important, especially if an LLC reports your profits as ordinary income. Once you understand the reason for Greeen's statement and you know how the law might support you, you may want to move on to the next part of the inquiry.

If you have a guy like Green telling you to change your profits from ordinary income to profits and losses from risk capital perhaps you should ask him how much it will cost to bring him to your audit. (At least that is what I would do) Now if he says you can rename your income the question becomes how to properly "rename" income; which forms do you use, how do you do it without begging for an audit. Do you actually use a red pencil? Do you use a sticky?

I know this, the way one expert said to "rename" or recharacterize the profits on your return was the exact procedure an IRS auditor said should not be followed. Who is right?

 
One of the primary reasons that most people join a Proprietary firm is that they don't want the restrictions that retail customers have. Market access is a gigantic issue. (And before you all post that you have "direct access" ...simply try this: If you have, say $20K in your account, try to buy 2000 shares of a $50 stock on the NYSE...the order will be rejected back to you for lack of capital, which it should, but how did that order know to be rejected unless it "flowed through" the brokerage house?)

Traders shouldn't be concerned about use of capital, they should concern themselves with trading, risk control, and costs. If you are long 1000 IBM, and want to buy 1000 LLY, you certainly don't want to have to sell IBM to free up money to buy LLY, do you? And the use of derivatives is much easier for prop traders, the costs are a lot lower (especially for active traders).

Regarding IRS stuff...Mr. Greene has talked to our people about various issues, and he is well known in the industry. We at Bright Trading try to keep it simple (kind of irritates a lot of accountants who want to sell LLC's or "S-corps" or "C-corps" to traders)....and please understand that I spent my first few years in Public Accounting, and have a pretty good grip on tax accounting. What we do, is make the election where our members are excluded from FICA (Self-employment tax to some), which saves you 15% right off the top. Then you can do whatever you want with the savings (invest for retirement, whatever). Our traders get a simple K-1 based on net earnings, and can literally pay $100 to have your taxes done. We allow our traders to submit their "outside trading expenses" i.e. cable, aol, computers, etc., to the firm for reimbursement from their own accounts, thus reducing their K-1 taxable income.

Keep it simple, it really is. Now, for the retail customer...(to be fair here), there are a couple of strategies being bantered about that may help with your current tax situation....and, as always, if you are trading as a customer, check with more than 1 accountant....and don't be talked into some silly "entity" which really does nothing for you (for the most part...there are a couple of rare exceptions).

And, please re-ask the LLC or tax questions (I may have missed them in the above).
 
People are concerned about whether they have to pay fica. (P.S. this discussion is going on on multiple threads and one of them touches on this exact subject and seems to equate to my understanding of the subject. Which is good enough for me and my taxes but my opinion is not strong enough for me to want to advise others. )

Scenario one - a traders income is reported as ordinary income by an LLC.

Under what circustances can the income be reclassified to profits and losses from trading capital.

Procedurally how do they do it.

Extra credit:

Do you see the IRS applying this law/rule consistently. Has it been tested. Do you think it is audit proof and why. (again check out the two tax sections on this site) I will tell you that one trader in my office was audited, he passed but he was advised to redo his return in a manner completely opposite of how one of the experts said to reclassify the income. But the reclassification was allowed.

I guess scenario two is whatever you want to explain, perhaps what happens at bright

thanks
 
I rely heavily on our Firm's tax experts, whose primary job is to assure us and our traders of the propriety of all IRS issues. We found that this "election" has been used extensively by other professional firms, not just trading firms.

When you trade tens of thousands of shares every day, the bookkeeping nightmare from trying to determine cap gains and mixed straddles and all that would be horrendous, and we found it to be of no value (as of this writing, who knows what the future may bring, that is why we pay those high fees, as a firm).
 
You wrote "...the order will be rejected back to you for lack of capital, which it should, but how did that order know to be rejected unless it "flowed through" the brokerage house?"

Does this mean that Bright trader's orders do not flow through some type of automated risk mechanism? Can a typical Bright trader therefore send an order for 200,000 shares of IBM? If not, what is different about the system that prevents this (and manages Brights risk) compared with how direct access orders "flow through" a brokerage house?
 
Originally posted by GHJ
Does this mean that Bright trader's orders do not flow through some type of automated risk mechanism?
More...
i could be wrong but i believe Don was really comparing INHOUSE vs REMOTE, not PROPRIETARY vs DAT, pointing out that for inhouse traders the order validation process is faster.

in my opinion, however, if one's trading system depends on the few (tens of) saved milliseconds to be profitable, it is not robust enough to use in practice.

- jaan
 
Actually, let's clarify this a little bit. All Bright Traders, in-house or remote, have their orders go direct. But since we then have access (after the order is placed) to the positions via our clearing firm (which is all linked together), we have primary risk control. If we need to restrict a trader for a short time, we can place "hard" or "soft" limits on the system.

Regarding "DAT" (which is impossible via a retail brokerage), all orders must go through the brokers computers to see if there is any margin rule violations. That was the reason for my example. This whole "access" thing was partly a result of the Senate hearings about "day trading" a couple of years back wherein they were going to reclassify professionals as customers (which would be a disaster for firms like ours and especially our traders). So the "compromise" was reached where we had our regulators propose that the Series 7 exam would be a requirement for all professional traders (so as to be allowed full access as exchange members, not be limited by capital margin, and have all the benefits that we have been accustomed to for decades). Since our Firm was in full compliance, and actually helped push through the regulations, we were thankful for the new requirements.

Hope this helps.
 
Don-
Isn't what you are referring to as "flow through", really happening at the user's end software?
Which is why anyone using Realtick at a retail firm needed to download the new version by Sept 28.

Maybe what you mean to point out is how some pro firms have 'direct' to the NYSE instead of using ECN'c or ISI.
Peace:cool:

(only 8 more days until I'll be golfing again:D )
 
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