Trade as Business vs. Trade Personal Account

J

jimclark

Wisers,
I was wondering what would be the be the advantages and disadvantages of trading as a Business vs. Private?

Currently, I have Individual Ameritrade Account, my account size is about $12,000. I trade in blocks of 2,000 shares (so about 2 stocks, average price $7). Volum is rougfly 15,000 shares a week.

I have a full time job, decent pay (about $70K/year).

If anyone can give any suggestion is much appreciated.
I am following to see:

-what are the tax benefits of trading as Biz
-what expenses I can deduct (ie Internet connection, fees, et)

Many thanks.
 
Quote from jimclark:
-what are the tax benefits of trading as Biz
-what expenses I can deduct (ie Internet connection, fees, et)
More...
It varies from country to country, but since neither your post nor your profile says in which country you're trading, it's not so easy for people to answer your questions, I think? I could answer them in some detail for the UK, but I don't know if that helps you?
 
I doubt it would be of any advantage to you to trade through a business in your current situation. Here are the reasons I did it in the United States:

1) I do alot of programming for myself. As it stands before I formed an LLC, I could not hire myself out to my company for programming services and could not take that off the top before paying taxes.

2) Setting up retirement accounts using pre-tax dollars.

3) Tax advantages having to do with dividends.

I am not tax expert and you should always check what I just said with people that advise on tax issues for a living.

http://www.greencompany.com

nitro
 
your asking the wrong question. the right question should be if i should file as a investor or a trader. and since you have a full time job and trade stocks, imo you have slim or no chances of choosing trader status which has tons of advantages or investor status.
 
Jimclark,

I think there are two ways you could think of trading as a "business". The first would be to declare trader status with the IRS. If that worked, which I don't think your current situation would apply, you could then deduct all trading expenses from your capital gains (software, magazine, computers, office space, ect....).

The next further step would be to set up a LLC business entity to trade your account through. The main advantage of this is that you could now set up a pre-tax retirement account for yourself, which you can't currently do if you are just trading from your own account. I think there may also be additional deductions for health insurance, but I am not exactly sure. I've also heard there is a lower probability of being audited if you do this since your returns are looked at by the corporate IRS guy--not the normal person wondering why you sold 20 million of stock throughout the year but only made 10K on it.

There is a good book on all of these topics in Ted Tesser "The New Trader's Tax solution." Good luck to you.
 
jbob, you shoul add that you cant contribute to a retirement account unless you pay yourself a wage and pay all the payroll taxes on that wage.
 
i use green and co for my taxes for the last 5 years and i'd consider myself and expert on trader taxes. first the first guy with a 12k account and fulkl time job can forget filing as a trader. #2 there's not such thing as filing with the irs for trader status. you simply put your occupation as "trader in securities" and file a sch c. what the person may have been talking about was filing with the irs for mark to market accounting which simply means you msut mark all accounts you use as trading as mark to market at year end. an example is if you hold 400 msft from tax year 2004 to 2005 and you have a $700 loss you must take that loss on paper for tax year 2004 even though you didn't sell it. if the stock goes up for you in tx year 2005 you must recapture the gain from the pt of the stocks closing prcie on dec 31st 2004. the advantage of mtm accouning is no wash rule accounting and 1 line accounting on all trades no matter how many. the second misconception is its better to set up an llc for several reason such as i can do a retirement plan, write of my self employed health insurance. one msut do the figuring to see if its an advantage. first thing if one makes 500k is it an advantage? the answer could be no and heres why. you could write of 50k or so in a retirment plan and lets say you take 7k in health insurance writeoff for a total of 56k. but ocne msut way the advantages of that agaisnt the disadvantages of paying social security on all the money you evnetially take out. thats 15% or so on the first 88k or so then 2% or so there after for meidicare tax which woulw be in excess of 22k or so. now if you make 150k it might be an advantage as your taxable rate would be much less after expenses. also remember the cost of doing the corotate return could be 1000or more per year. also another misconception i think is wrong is with an llc less chance of being audited. a trader accountant might try to scare youa nd say man with 400 million of sch d sales its going to look bad if you only make 30k. put it udner a corp and theres less scrutiny. i don't know if i belive that. bottom lin if you're trading 300 million fo stock year after year and make no money the irs will get suspicious and audit you or deny all writeoffs under the hobby rule
 
Quote from joeyata1:

i use green and co for my taxes for the last 5 years and i'd consider myself and expert on trader taxes. first the first guy with a 12k account and fulkl time job can forget filing as a trader. #2 there's not such thing as filing with the irs for trader status. you simply put your occupation as "trader in securities" and file a sch c. what the person may have been talking about was filing with the irs for mark to market accounting which simply means you msut mark all accounts you use as trading as mark to market at year end. an example is if you hold 400 msft from tax year 2004 to 2005 and you have a $700 loss you must take that loss on paper for tax year 2004 even though you didn't sell it. if the stock goes up for you in tx year 2005 you must recapture the gain from the pt of the stocks closing prcie on dec 31st 2004. the advantage of mtm accouning is no wash rule accounting and 1 line accounting on all trades no matter how many. the second misconception is its better to set up an llc for several reason such as i can do a retirement plan, write of my self employed health insurance. one msut do the figuring to see if its an advantage. first thing if one makes 500k is it an advantage? the answer could be no and heres why. you could write of 50k or so in a retirment plan and lets say you take 7k in health insurance writeoff for a total of 56k. but ocne msut way the advantages of that agaisnt the disadvantages of paying social security on all the money you evnetially take out. thats 15% or so on the first 88k or so then 2% or so there after for meidicare tax which woulw be in excess of 22k or so. now if you make 150k it might be an advantage as your taxable rate would be much less after expenses. also remember the cost of doing the corotate return could be 1000or more per year. also another misconception i think is wrong is with an llc less chance of being audited. a trader accountant might try to scare youa nd say man with 400 million of sch d sales its going to look bad if you only make 30k. put it udner a corp and theres less scrutiny. i don't know if i belive that. bottom lin if you're trading 300 million fo stock year after year and make no money the irs will get suspicious and audit you or deny all writeoffs under the hobby rule
More...


If you have three taxable accounts, one of which you use for trading and two which you use for long-term investing, can you elect MTM on only the one trading account and use the more favorable long-rerm capital gains rules for the other two accounts?
 
Quote from jimclark:

Wisers,
I was wondering what would be the be the advantages and disadvantages of trading as a Business vs. Private?

Currently, I have Individual Ameritrade Account, my account size is about $12,000. I trade in blocks of 2,000 shares (so about 2 stocks, average price $7). Volum is rougfly 15,000 shares a week.

I have a full time job, decent pay (about $70K/year).

If anyone can give any suggestion is much appreciated.
I am following to see:

-what are the tax benefits of trading as Biz
-what expenses I can deduct (ie Internet connection, fees, et)

Many thanks.
More...
ADDITIONAL INFO:
I'll filing in the United States-country
 
yes you can segregate accounts between long term accounts for more favoable long term gains and short term accounts used for trading and mtm accounting. BUT YOU SHOULD USE DIFFERNT BROKERS. FOR ISNTANCE USE AMTD FOR LONG TERM TRADING AND IB FOR SHORT TERM AND MTM ACCOUNTING. NOW IF YOU AHVE 4 LONG TERM ACCOUNTS AND 1 SHORT TERM THE IRS MIGHT SAY SOMETHING
 
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