Did a search for this topic, only pulled up posts that were a few years old. 1) Does anyone trade for a living on ET through their own entity, either C-Corp or LLC? 2) What are the advantages to this financially - I know about the liability side, but is there really a benefit tax wise or any other benefits for that matter besides being able to write off your expenses? Thanks for the feedback!
there are disadvantages to trading through a c-corp. general rule - do not do it. You can sometimes justify using a c-corp if you want to, in ADDITION to the trader vehicle. yes there can be tax advantage for using an LLC, or other entity per se. For some people it's of great significance to their tax situation. There are some great benefits for some people: health insurance deduction, retirement plan deduction, better justifying trader status. and numerous smaller benefits that only are beneficial to a very few people. To other people an entity offers them nothing at all beyond what individual trader status offers them.
I haven't read enough about "trader status" and what it does for you from a tax standpoint etc. Can you explain what being classified as "trader status" does for your bottom line when it comes to tax time?
if you set up an LLC you can then open a SEP-IRA which would allow you to sock away up to 46K a year tax free, as opposed to the normal 16K or whatever a year.
For the sake of clarity, it is more "tax deferred" than "tax free". Also, except for these two possibilities of higher differed taxes and deductibility of health insurance, a simple Schedule C allows yoou to deduct all your trading business related expenses. No need to incorporate just for expenses deductibility.
Isn't there more to it than setting up an LLC? I looked into this a couple of years ago and if I recall correctly the IRS had some very strict rules on the definition of "trader status" and it is very difficult to prove. For example, if you had anything that could be defined as employment the IRS would disallow your "trader status". I believe there was a landmark case recently where a full-time trader took his case with the IRS to court and lost even though he traded full-time. UPDATE: found this http://www.tradersaccounting.com/tradertax.asp which gives examples of why it is difficult to prove trader status with the IRS.
The taxpayer must meet the requirements of trader status as step #1. That's active trading (not buy & hold), as described in the previous link. A key factor in using a separately filing 100% pure play trading entity is that by definition the entity has no other source of revenues and has no other activity(employment) besides 100% of its existance doing trading.
Our traders are much better off not using an LLC or a C Corp (or an S corp). As an individual member of our LLC, you have limited liability (not so if a corp, you have to sign personal guarantees), and you're exempt from FICA (Self Employment Tax. FWIW, Don
Don, you never heard of a straw man trader? You don't think there's any in your LLC? Think again. Stick to running a great prop trading firm and leave the taxes and legalese to others. .
I have to admit that it's been a while since I took my CPA exam and worked in Public Accounting (got tired ouf counting "other people's money" after a few years, LOL), but even an "out of touch" guy like me knows about "straw man" and BK, and other rulings. I don't see where you're going with that in regards to my business or LLC traders, please feel free to bring me up to speed. (curious) Don