Trader Tax Status

W

whitetanman

I'm trying to weed through hundreds of various documents trying to get a definitive answer on losses.

I will soon set up an LLC to trade, but for now I am just doing it out of my personal account.

I have a full time job but still manage to trade 5-10 times a week. I am worried about not being able to deduct for losses, expensis (newsletters) and other associated costs of trading, if I am NOT officially a full time trader.

Should I stop trading until I get the LLC set up, or will I be able to deduct full losses and expensis on my income tax as a part-timer?

Regards,

John
 
You don't have to trade full time, BUT, you do have to be able to provide evidence that you are not primarily an "investor", and one of the principle tests used for that is whether you "attrmpt to profit from daily moves". You will have lots of people tell you that it is hard or impossible to qualify with a "day job", but that is simply not the case. It is a largely subjective decision on the part of the IRS, based on your trading patterns, size, etc (It would be a lot tougher with a $15,000 account trading one-lots). I have filed with trader status for about 8 years and have always had a "day job" as a college professor (psychology, not finance). I also have a CBOT membership, though, and trade a lot, but I have never had it questioned. Good luck!
jessie
 
Jessie has a good point above. It is certainly possible to garner trader status with a full-time job outside of trading (and something like an exchange membership is a huge plus in his example).

However, the majority of part-time traders I run across think all they need to do to "self-inflict" trader status is to declare themselves such or form some type of entity. In my opinion they don't have a chance in hell with the IRS.

My advice would be to look up the IRS rules for qualifying as a trader (Topic 429 at www.irs.gov), step back, and objectively look at your trading from their point of view. If you're someone who treats trading like a business, is active in it almost every day, trades almost every day or at least a few times a week, and pulls in a significant percentage of total income from trading then you've got a shot at it.
 
With an entity (LLC) do you need to qualify for trader tax status to be able to deduct your LLC expenses (data fees, hardware/software fees, etc)?

If you can deduct the LLC expenses without qualifying for trader tax status, then what is the benefit of trader tax status (for an LLC/entity)? Is it "just" the ability to treat losses as ordinary income?
 
Quote from SideShowBob:

With an entity (LLC) do you need to qualify for trader tax status to be able to deduct your LLC expenses?

If you can deduct the LLC expenses without qualifying for trader tax status, then what is the benefit of trader tax status (for an LLC/entity)? Is it "just" the ability to treat losses as ordinary income?
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That's part of what I've been cautioning against - simply forming an entity to encapsulate your trading may not fly with the IRS. I can't form an LLC, make two trades a year, and write off $10 grand in trading expenses and hope to get away with it year after year (a gross example, but I know people not far removed from this).

The LLC/entity route is typically good for two things, 1) shielding from potential liability (if you deal with clients/customers), and 2) converting trading profits into earned income for a retirement plan.

If you're a "trader" in the IRS' eyes then just deduct your expenses off Schedule C. No need for the LLC/entity malarkey.

Of course, some folks may have complicated scenarios that justify complicated setups. But most here I suspect could do with keeping it simple.

Also, folks, get a lawyer if you're going to go this route and there's any doubt.
 
LLCs also let you pool money....

Assuming you're not doing something ridiculous (like your example) and you're only trading futures I don't see any benefit to trader tax status for an entity.....you can write off the expenses and get to pass through section 1256 losses....although I guess if you don't have gains to offset them you lose the ability to offset ordinary earnings....
 
I was worried that I would only be able to write off 3K in losses as a non-trader, and having a full time job made me worry that I would not be considered a full time trader, should I be audited several years down the road.

Nothing worse than paying a lot of back taxes.

I was also hoping to keep the money in the corporation until at a much later date, after having built up a lot more capital. Essentially, I'd like to use the power of that money to build more, rather than having to loose 30% all along the way.

Thanks for the link to this site. I've read more than a few 'tax trader accounting' sites and I just never know what to believe.
 
Quote from whitetanman:

I was worried that I would only be able to write off 3K in losses as a non-trader, and having a full time job made me worry that I would not be considered a full time trader, should I be audited several years down the road.
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Let us know if you get a response from Robert Green.
 
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