Benefits Abound For Active Traders Who Incorporate By Robert Stammers AAA | With the proliferation of online anddiscount brokerage, people are trading the stock market in ever increasing numbers. However, as an individual or sole proprietor, traders cannot take advantage of the myriad of tax advantages and asset protection strategies available to companies. Trading the market can be a gainful way to make extra income, or even possibly a full-time living. Like any business, the income generated from trading is taxable and can create significant tax liabilities for the successful trader. (For more on this, read ourBrokers and Online Trading Tutorial.) In deciding on what structure to trade through, individuals can trade as individuals orsole proprietors, qualify for trader status, or trade through a business entity. For the active trader, creating a legal trading business will often provide the best tax treatment and asset protection. Tax Issues According to the IRS, "trading" is not a business activity. In fact, all income from trading is considered unearned, orpassive, income. The presumption is that individuals are investors and that any trading activities are done for long-term capital accumulation and not for payingcurrent liabilities. For this reason, unless an individual can qualify for trader status, he or she will be treated as any other tax filing individual. (For seven guidelines to help you keep more of your money in your pocket, readTax Tips For The Individual Investor.) http://www.investopedia.com/articles/trading/09/incorporate-active-trading.asp
Please clarify, It has been said that those who do futures (CME Emini contract trading, or full sized futures, or similar) have a different basis to consider incorporation from those who.... Primarily trade equities, options and bonds; possibly even a different basis to consider incorporation from those who... trade both futures, and equity based vehicles.... If one remains only in one camp (i.e. futures only, or equities only) could you comment on that please? thanks
Forming an entity taxed as an S-Corp can save active business traders significant taxes. With an S-Corp, business traders solidify trader tax status, maximize employee-benefit deductions (such as health insurance and retirement plan deductions) and gain flexibility with a Section 475 election. The S-Corp creates earned income (compensation) for maximizing employee-benefit plan deductions. Sole proprietors cannot create earned income from trading gains with one exception: full members of a futures exchange have self-employment income from trading on the exchange. Partnerships have great trouble creating the earned income. The S-Corp is the answer. I wrote a recent blog on this S-Corp tax strategy. http://www.forbes.com/sites/greatsp...s-face-march-15-deadline-for-s-corp-election/