Trader status for U.S. and offshore taxes

T

trader56

Just curious as to how many claim Trader status for U.S. taxes?

This includes filing schedules C and D, and the 475 (I think I've got these right...).

In the mid-late 90's, I and many others on the floor did this. I've been away from trading for awhile, but am returning, so am trying to get reacquainted with all this again.

I've got Tesser's book, The Trader's Tax Solution, published in 2000, but would be interested in thoughts and experiences of others doing this currently.

Would also like to hear how this issue is handled in other countries - Europe, Asia, etc.

Thanks!
 
Quote from trader56:Just curious as to how many claim Trader status for U.S. taxes?
In the mid-late 90's, I and many others on the floor did this.
would be interested in thoughts and experiences of others doing this currently.
More...
In 1997 the IRS Code was changed to allow a section 475 M2M election for Traders (similar to that already in effect for Dealers). The rules to elect are stringently enforced by IRS due to their perceived potential for "abuse."

Properly done, by a bona-fide securities trader, there are many filing with trader status and obtaining the tax benefits.

A few years ago the IRS Instructions for Schedule D and Form 4797 were modified to acknowledge Trader Status, and the IRS web site followed with "helpful hints" on this topic as well.
 
Quote from trader56:

Just curious as to how many claim Trader status for U.S. taxes?

This includes filing schedules C and D, and the 475 (I think I've got these right...).

In the mid-late 90's, I and many others on the floor did this. I've been away from trading for awhile, but am returning, so am trying to get reacquainted with all this again.

I've got Tesser's book, The Trader's Tax Solution, published in 2000, but would be interested in thoughts and experiences of others doing this currently.

Would also like to hear how this issue is handled in other countries - Europe, Asia, etc.

Thanks!
More...

The IRS depends mainly on case law to determine trader status. There are no specific rules laid out. However, the IRS website contains broad guidelines which help to determine if you qualify for trader status.
Electing Mark to Market has its pros and cons. The big advantage is your taxes are taxed at the regular rate so you save a lot in that regard. A huge drawback is that once an individual elects Mark to Market he is stuck with it. You cannot change your election to any other method without the written consent of the IRS.
Also if you choose to elect Mark to Market you should make the election one year prior to the actual year that you file taxes with the Mark to Market election. For example: If you plan on filing taxes with the Mark to Market method for 2006 you should have made the election in 2005 - by sending the required documentation to the IRS in 2005.
The IRS website has good information on all the above.
 
ak15 your info is sketchy at best. FIRST MTM IS TAXED AT YOUR TAX RATE AND THATS A DISADVANTAGE NOT AN ADVANTAGE VS A INVESTOR WHO HOLDS A YEAR AND PAYS 15%. 2ND YES YOU ARE STUCK WITH MTM BUT IT MATTERS LITTLE AS YOU CAN DESIGNATE LONG TERM ACCOUNTS TO TAKE ADVANTAGE OF THE 15% CAPITAL GAIN TAX LAW JUST LIKE ANY OTHER INVESTOR. THE PRO'S OF MTM ARE YOU AVOID THE WASH RULE AND YOU'RE NOT HELD TO THE 3K CAPITAL GAINS LOSE OF AN INVESTOR. FOR A ACTIVE FULL TIME TRADER MTM IS THE WAY TO GO
 
Quote from brandon12:

ak15 your info is sketchy at best. FIRST MTM IS TAXED AT YOUR TAX RATE AND THATS A DISADVANTAGE NOT AN ADVANTAGE VS A INVESTOR WHO HOLDS A YEAR AND PAYS 15%. 2ND YES YOU ARE STUCK WITH MTM BUT IT MATTERS LITTLE AS YOU CAN DESIGNATE LONG TERM ACCOUNTS TO TAKE ADVANTAGE OF THE 15% CAPITAL GAIN TAX LAW JUST LIKE ANY OTHER INVESTOR. THE PRO'S OF MTM ARE YOU AVOID THE WASH RULE AND YOU'RE NOT HELD TO THE 3K CAPITAL GAINS LOSE OF AN INVESTOR. FOR A ACTIVE FULL TIME TRADER MTM IS THE WAY TO GO
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It is an advantage -MTM converts capital gains and losses to ordinary gains and losses, so there is no limit on the amount of losses that can be deducted (there is a $3,000 limit on capital losses). MTM traders are also exempt from wash sale rules.

If you did not elect MTM, then you may not use MTM and you must use the "cash method," which is the default method. The cash method is the same as what investors use, meaning that all trading gains and losses are treated as capital gains and losses, and you are subject to the wash sale rules.

When I say that you are stuck with the MTM election, I am talking about quitting the trading business altogether. Then you have to get written permission from the IRS to convert to the cash method - a laborious and time consuming process. I am not talking about just designating long term accounts to take advantage of the 15% capital gains tax law. I am referring to a situation where you might want to eschew trading and change occupations.

There is no argument about active traders using MTM. The point here is if you decide later on that trading is not working for you and you decide to find a regular job then the problems start - circa IRS permission process and the surrounding issues.
 
ok i misunderstood your note. i thought you meant mtm was a tax rate advantage over a regular investor. if one is mtm and exits the trading business no big deal just close your mtm accounts that you filed with the irs and open new accounts and file everything as an investor under sch d and file nothing under mtm. i mean your short term gains are still taxed like regular income even as an investor
 
Quote from brandon12:

ok i misunderstood your note. i thought you meant mtm was a tax rate advantage over a regular investor. if one is mtm and exits the trading business no big deal just close your mtm accounts that you filed with the irs and open new accounts and file everything as an investor under sch d and file nothing under mtm. i mean your short term gains are still taxed like regular income even as an investor
More...

If you can claim trader status it is clearly beneficial to use MTM for your trading account. Your long term investments have to be kept under a separate account and will be treated as capital gains and losses and subject to wash sale rules.
However, once you elect MTM for your trading account you are stuck with it. You need written approval from the IRS in order to change your MTM status to the cash method or any other method for that matter. You can't just close your MTM accounts and open new accounts and file everything as an investor. You have to file a petition with the IRS requesting a change in accounting methods and receive written approval from them allowing you to do so. I am referring specifically to your trading account for which you made the MTM election. Your long term investments if any will remain as such and are not affected.
So if your quit trading and find a regular job you can't just file taxes as a regular employee using the cash method. You have to get written approval from the IRS ratifying your change from MTM to whatever method you applied for - in the above example as an employee of a firm. Even if for whatever reason you wanted to change your status from MTM to a regular investor for your trading account you still have to acquire written approval firm the IRS.
 
Quote from brandon12:

ok i misunderstood your note. i thought you meant mtm was a tax rate advantage over a regular investor. if one is mtm and exits the trading business no big deal just close your mtm accounts that you filed with the irs and open new accounts and file everything as an investor under sch d and file nothing under mtm. i mean your short term gains are still taxed like regular income even as an investor
More...

Also go through the attached link containing instructions and procedures requiring consent from the IRS to change from MTM accounting to other accounting methods -

http://www.irs.gov/pub/irs-irbs/irb97-39.pdf
 
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