Trader tax status question

[10_bagger]

I wanted to know if you have trader tax status and elect market to market accounting, are your trading income considered “earned income” by the IRS?

To my understanding, trading income does not count as “earned income” but a friend of mine is saying it is so I want to confirm this with someone who have knowledge in this matter.

If anyone know the answer to this, please let me know. Thanks.

 

[Girija]

I wanted to know if you have trader tax status and elect market to market accounting, are your trading income considered “earned income” by the IRS?

To my understanding, trading income does not count as “earned income” but a friend of mine is saying it is so I want to confirm this with someone who have knowledge in this matter.

If anyone know the answer to this, please let me know. Thanks.

Of course you should consult a cpa. Trading revenue in mark to match section 475 is ordinary gains and losses and section 1256 is not applicable.
Trade income is not earned income.

 

[10_bagger]

Of course you should consult a cpa. Trading revenue in mark to match section 475 is ordinary gains and losses and section 1256 is not applicable.
Trade income is not earned income.

i plan to contact my cpa but it takes a couple days to hear back from him at the earliest so I thought I give elite a try first to see what some of the members say.

 

[Shadetree42]

There is some good info. here:

https://greentradertax.com/how-to-be-eligible-for-substantial-tax-savings-as-a-trader/

 

[10_bagger]

There is some good info. here:

https://greentradertax.com/how-to-be-eligible-for-substantial-tax-savings-as-a-trader/

I went to the green’s website and looked at the info. The link didn’t work but thanks.

 

[Girija]

I went to the green’s website and looked at the info. The link didn’t work but thanks.

If you want doc check out irs topic 429 traders in securities.

 

[10_bagger]

If you want doc check out irs topic 429 traders in securities.

Thanks Girija, I read that as well. Where my friend and I are having a confusion is the interpretation of what we read.

"if a trader makes a timely mark-to-market election, then he or she can treat the gains and losses from sales of securities as ordinary gains and losses (except for securities held for investment - see above)"


My friend said that based on the paragraph above taken from the IRS website where it say that "ordinary gains and loses" is counted as "earned income".

I told her, no it doesn't.

 

[Fonz]

Thanks Girija, I read that as well. Where my friend and I are having a confusion is the interpretation of what we read.

"if a trader makes a timely mark-to-market election, then he or she can treat the gains and losses from sales of securities as ordinary gains and losses (except for securities held for investment - see above)"


My friend said that based on the paragraph above taken from the IRS website where it say that "ordinary gains and loses" is counted as "earned income".

I told her, no it doesn't.

You are both not quite right:
Earned income is employee compensation (wages, tips,...)
What you name ordinary gains and losses is in fact ordinary income which is business income and this is why you can deduct your business expenses, like wages, data fees, etc.
You could check:
http://daytradertaxes.blogspot.com/
https://traderstatus.com/traders/securities-trader/am-i-a-trader/

 

[Girija]

Thanks Girija, I read that as well. Where my friend and I are having a confusion is the interpretation of what we read.

"if a trader makes a timely mark-to-market election, then he or she can treat the gains and losses from sales of securities as ordinary gains and losses (except for securities held for investment - see above)"


My friend said that based on the paragraph above taken from the IRS website where it say that "ordinary gains and loses" is counted as "earned income".

I told her, no it doesn't.

I am of the view that your friend is incorrect. I am not a section 475 elector. So my interpretation could mean nothing. Earned income is only when you worked. Trading is not work in IRS view. Ordinary gain goes into a different bucket. There is no employment tax.
CPA is the best route.

 

[10_bagger]

Your friend is right:
Earned income is employee compensation (wages, tips,...)
What you name ordinary gains and losses is in fact ordinary income which is business income and this is why you can deduct your business expenses, like wages, data fees, etc.
You could check:
http://daytradertaxes.blogspot.com/
https://traderstatus.com/traders/securities-trader/am-i-a-trader/

hi fonz,

I’m the one that said income generated through trading is not counted as “earned income” and she is the one that say it is if you have trader tax status and elect mark to market.

So are u saying that trading income are counted as “earned income”?