If you do an llc and it's disregarded for tax purposes then follow this guide direct form irs and elect trader status and mark-to-market to take full advantage of no wash sale problems and no self-employment tax (that's what irs states; not subject to se tax if you follow this route). http://www.irs.gov/taxtopics/tc429.html
i have problems with those two- Your activity must be substantial, and You must carry on the activity with continuity and regularity. define substantial? is 2 trades10K $ each is substantial? if you traded every day and then took 1 month vacation-your status is in question. penalties pending. If you have made a valid election under section 475(f), the only way to stop using mark-to-market accounting for securities is to request and receive written permission from the Service to revoke the election. is ANYONE from this forum actually DID revoke his election successfully? those whole trader status "rules" are so vague that anyone can be penalized any any time. thank you,but no thank you.
"define substantial? is 2 trades 10K each is substantial?" About 500 round trip trades per year according to Robert Green citing recent case law for trader status. Of course there are other factors too..... http://www.greencompany.com/EducationCenter/Trader-Tax-Center/Trader-Tax-Status.shtml
there is actually a court case where they went through how they determined the points you brought up. guy only traded 45% of the time, lost his status. it's true basically you need to be trading daily (applies to me) and essentially your primary source of income (applies as well) no other day job. it's worth it if you qualify, why would you want to be restricted by wash sale rules and limited deductions? it restricts investments held as stated by irs but i trade derivatives i don't hold stocks long. i'm curious what advantage you would have over those who do elect m2m and are classified as trader instead of standard investor. the irs wouldn't make it hard to qualify if it wasn't an advantage. it seems they want to make it difficult to attain so you cannot enjoy the benefits it entails (liability benefits of llc structure without SE tax, no wash, deductions).
as i pointed at the beginning of the thread(2009 btw)-you can have all legal deductions by trading vial LLC without electing M2M. wash sales ain't that scary..for me it's about $1-2K a year(and i have about 100K trades\executions). was it really worth the hassle to elect M2M and deal with all those rules in order to be in "compliance")? and pay x10 to accountant for my taxes? probably not. no to mention the fact that in my 10+ years of trading there was a plenty of periods when i wasn't' trading at all. cause the market changes,cause edge can go away at any time. what you gonna do then? to maintain your status? without M2M i'm free to do whatever the f** i want and not obligated to have "substantial activity". so..f** it
then if in all your years of trading you never have more than $3,000 in losses in any one year that cannot be offset that year it absolutely wouldn't benefit you. 10 years ago i was stuck with $50,000 plus of capital loss carryforwards and only able to deduct $3,000 per year against my income. no more. plus you can deduct all your trading expenses. if it doesn't fit your trading no bother, but it gives you advantages even floor traders are not allowed have (no se taxes with there accounting ability). with todays software its not that much of a hassle.
you can always write off your loss against your(or your spouse) ordinary income. just don't let it go to some crazy amounts,you know..cut the losses,let the profits run..
From what i've researched its basically two main advantages according to accountant: Since all positions marked to market (priced to year end market prices) at year end, there are no wash sales to calculate or report to the IRS. If you happen to have a loss from trading greater than $3,000 you can deduct this loss from any other income, and possibly ammend a previous year's tax return and get a refund. I wasn't aware you could deduct your losses in excess of $3,000 against ordinary income if you are not trader status or with m2m. I was under the impression it was capped at $3,000 for standard investor. The cut the losses let the profits run is cool but once you start trading larger amounts daily/monthly losses and profits can fluctuate between $10k-$30k which would make the keep the deductions reasonable part tough to hold to. In either case at least getting the trader status with substantial activity by itself even without m2m seems superior to the plain vanilla investor classification. I'm reminded of someone telling me he's glad he didn't win the lottery because he'd have to pay ALL THOSE TAXES. I hope i have to pay a lot of taxes with trading.
Since most traders have no employees, and no real sources of liability like a conventional business (e.g. someone falls and breaks a leg in your store, or finds a cockroach in the sandwich you sold them), for the overwhelming majority of traders it makes no sense to trade through a corporate entity. All it does is create accounting hassle and potentially affect your tax treatment while offering little or no value. Likewise, the ability to write off expenses or trading losses against regular income is all well and good - but most traders don't have many 'expenses,' and if you're continuously having to write off large trading losses against some kind of earned income stream then accounting questions are the least of your problems.