Massachussets imposes a 12% State Tax on all short term capital gains. No wonder there are hardly any prop shops in Boston! I am planning on moving to Boston and am a remote equities trader who currently files a k-1, reporting all income as short term capital gains. How can I avoid paying that 12%? Can I set up a business entity in, say, Delaware, to avoid it? Thanks for any input.
you might consider setting up a "hedge fund" with offices in nevada or florida. Get some small investors (maybe insignificantly small) and then pay yourself a salary as a trader and maybe someone else as bookeeper. The salary in MA would be taxable but if set up properly and elected marked to market you might avoid state income tax and fica on the profits. You should become very knowledgable about this or hire a very smart lawyer and accountant. And there is no guarantee your structure will not be challenged. Back when I was making enough trading to care about this - I had to educate all the accuntants for my business. for the smart ones it rang a bell immediately. some just never could get why a trader did not have to pay fica if he was not a dealer or a floor trader. By the way this distinction was not something prop firms wished ackowledge either. But the IRS did in my case becasue I explained in on my returns and in a trader in my offices case when he was audited.
If you are going to be / file as a MA resident (which I was for 5 years), I don't see how you could escape the state income tax on most of your income. Regardless of what form that income takes or what business structure you set up and where. Since you trade remotely, what is the reason for the move? From how far? Wife / kids involved? Buy / rent, city / suburbs? Depending on those factors, you may also consider that next-door New Hampshire has no state income tax, as well as generally much more bang for the buck, in terms of RE, lifestyle, etc. Nashua area is a sub-40-minute drive from downtown Boston; Seacoast isn't much further. Filing as a NH resident might be an attractive solution, obviously, subject to what your / your family's needs and priorities are.
I thought if you file MTM or go through a prop house trading stocks only, your profit will be your regular income right. It does not show up as short term capital gain. Unless you are trading futures, which is break up into long and short term capital gains. Am I missing something
I'm also planning on moving to MA sometime this year. I use MTM so I was also thinking that gains from trading would be reported as ordinary income. But if anyone has any experience on MTM capital gains vs. ordinary income, especially in Massachusetts I'd love to hear it.
The structure of trading has changed. Especially for Nyse stocks. But before you accept that fact that profits from prop trading are income, you should take the time to read the irs code Understand the difference between a capital gain and a salary. If you are trading your own money -- read the code and see if you are forced to call profits on your holdings salary. I would still argue you are not holding inventory for the public the way dealers to the public and floor traders are. But I have not read the code lately. A few years back prop trading firms would doing a major disservice to their tradrers by characterize their gains as salary.
NH does have state income tax on "unearned" income like cap gains, but its still less than 12%. Mass blows.
Incorrect. Unearned income applies only to dividends and interest. Capital gains are NOT taxed. Dividends and interest are taxed at 5%, with a $2,400 personal exemption ($4,800 married).