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12% short-term capital gains MA State Tax

  1. 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.
     
  2. 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.
     
  3. LOL Don't move to Taxachussets!
     
  4. If you don't mind to move further north, try NH, no state income tax.
     
  5. 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.
     
  6. 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
     
  7. 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.
     
  8. 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.
     
  9. NH does have state income tax on "unearned" income like cap gains, but its still less than 12%. Mass blows.
     
  10. 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).
     
  11. Thanks for all the responses.

    The combination of NH's 0% state taxes plus the high cost of health insurance for self-employed individuals in MA make NH pretty attractive. But I have a network/family in Boston which is I why I'm moving to that area in the first place.

    I spoke to a Massachussets cpa friend who happens to have a large day trader as a current client (who, he told me, lost 1 mil. dollar in 2006 (holy $@#!)). This cpa said that if the short term capital gains income is my full-time primary source of income, then the 12% does not apply, and I just pay the regular MA State Tax rate on the income. That sounds ideal to me but he didn't elaborate on specifics.

    Anyone know about this exemption?
     
  12. it would seem - i f you go that route then -- you are calling your gains from trading ---- income.

    Calling it income - causes you to pay self employment fica. Which is what - 15% on the first ________ thousand

    as i warned earlier- not many cpas have explored the irs code regarding gains vs income for full time traders. The ones that have in Chicago are used to working with floor traders. The ones in new york are used to working with dealers.

    However, if you have consistently substantial income - you may wish to pay the fica, call it income, and then fund your retirement account - which you could trade tax free.
     
  13. Good point. I'm going to check with the cpa on that. I will have to see if avoiding the 12% short term capital gains tax is possible if one submits a k-1 and pays no FICA. If I can only avoid the 12% by submitting a 1099 and paying the 15% fica, then the situation is looking kind of crappy for MA.

    Although I haven't crunched the numbers, I've heard that if you max out retirement contributions, then for certain ranges of earned income the total effective tax rate when submitting a 1099 is not that different to what you get when you submit a k-1.

    But any difference in effective tax rate (with respect to 1099 vs. k-1) plus NH's 0% tax rate (vs. 5-6% in MA) add up to make a significant difference, I think.

    We'll see what the cpa says.
     
  14. Hey, Bouncy -

    What did you end up deciding re: MA and taxes? I trade in MA and have been simply taking it as ST cap gains. My accountant doesn't seem too up on it, and I'd love to know if there's a better approach.