I'm an ordinary guy w/a day job. I've been reading up on short term & long term cap. gains and wash sale rules and I'm a little scared come tax time. My trade strategy is long term but I do scalp from time to time and exit long positions by stop loss sales quite often (many times w/o going back in). I'd say I do less than 200 trades a month. Should I look into forming an llc or s-corp? If so, why? Should I look into mark-to-market trade rules (how will these help me? Is there a process to qualify?) Any advice welcome. PS:I thought cap. gains were cap gains, initially didn't know there were long term rules.
See if this helps you any: https://www.lightspeed.com/active-trading-blog/entities-provide-tax-benefits-traders/ http://greencompany.com/ http://www.investopedia.com/articles/trading/09/incorporate-active-trading.asp
Are you treating your trading as a business? It sounds like something you are doing on the side in addition to your real job. I would not form an LLC or S-Corp in your situation. It is possible that you might qualify for "trader tax" status, but maybe not. It is a gray area, and it is possible the IRS would challenge your qualification. Trader tax status gives you the option of filing for mark-to-market and enables you to write off business expenses against your trading profits. It enables you to not worry about wash sales. However, the trade-off is that if you use "trader tax" status, then even though wash sales go away, it also complicates the rest of your tax return. If you are trading the same security over and over again during the year, then you will most likely show wash sales. However, if you profit on that security for the whole year or you don't trade it one month between December and January, then you can break the wash sale so that it doesn't matter to your total tax liability. I don't think there is an easy answer, but given what you wrote I would not form an entity, I would not try to qualify for "trader tax" status, and I would report all the wash sales for 2016 appropriately. Then I would brush up on the tax law and minimize future wash sale problems by trading differently during the bridge month between 2017 and 2018.
Thanks for the advice. To answer a few questions, no I am not treating this as a business, in fact, a lot of my moves were done on my 401k and IRA before I opened an account w/IB. I'm actually afraid I may have had a wash sale in my IRA as this is a big no-no as I understand it? I don't think I'd qualify as a trader to get the MTM exemption which is why I wonder if it'd be beneficial to create an entity. However I wonder how I could offset losses incurred using MTM against my other ordinary income, is it even possible or only the income created by the entity? Ideally I'd like to have the ability to protect my position w/stop loss or stop limit orders but remain in the long capital gain bracket.
Here is an article on the wash sale rule and IRAs: http://www.investopedia.com/articles/retirement/09/ira-wash-sale-rule.asp I am not a tax expert and what I am saying may be incorrect, but I believe in order to set up an entity, you have to qualify for trader tax status. Am not sure you can set up a trading entity if you are not deemed to be a trader in the eyes of the IRS. I could be wrong on this. You can't have a stop and guarantee yourself of a long-term capital gain. That is unless you have already held the position for a year, then the stop is okay.
Seems from my readings it's easier to form an entity to get MTM because the IRS rationalizes that no one would go through the trouble to do so. If I Incorporate, my long/short cap gains would also become non issue since all gains would be taxed at 15% as I understand it.
You should do some research about incorporating and the time/fees involved (and every year thereafter). I would not go down that path.
Just make it super easy on yourself and take December off. If you don't trade for the entire month of December, it is IMPOSSIBLE to have a wash sale which carries into the next tax year. All the other wash sales during the year are just a bunch of superficial bookkeeping that means absolutely nothing on your annual tax filing. You'd save yourself a whole mess of issues if you'd just stick to trading Section 1252 contracts. Get the 60/40 tax break, put the one-liner on your tax form, no write-offs, no biz associated with your trading...you're done.