If you own the CME IOM Membership as an Individual Member (I am an individual/sole proprietor who only trades my own account from my home). Do I have to pay self employment taxes (FICA)? Do I pay taxes on capital gains as ordinary income? If so, why would anyone ever want to buy a membership? Thanks, Rick
Your professional status as a member is different from your tax status. The clearing fee that you pay will be cut by approximately half for all option products. You will, however, have considerably higher data fees. To generate a high enough level of transactions, you would also be using expensive auto quotation software to build your positions and capture some edge. ie. market making software
Im a little surprised xandman didn't give you a more complete answer. Oh well. If you own a membership, presuming you want to deduct membership costs, costs associated with the entity, data-feed and other trading related costs, and other entity-possible expenses, you will need to pay SE tax. Or, you could roll the dice and claim all those deductions against capital gains income, which is not allowed! And therein is the rub. You, as an individual, an investor in the eyes of the IRS, can offset capital gains with capital gains, or you can list acceptable expenses abiding by the rules of Schedule A, Itemized Deductions, miscellaneous expenses. Obviously, you must itemize as opposed to taking the standard deduction for this to be of any benefit whatsoever. With investor status, direct offset of capital gains is not allowed with deductions and expenses. And that brings us to why have a membership. As mentioned, significantly lower transaction costs is one reason. Legitimizing your trading business (in the eyes of the IRS) is another. Simply, but not necessarily literally, a trading business can expense against capital gains. The IRS distinguishes between a legitimate trading business and an investor. This is commonly referred to as Trader Tax Status (TTS). TTS has several tax benefits vs investor status, but also involves paying SE tax, allowing an employee of a trading entity to have EARNED INCOME (which in a trading business comes from capital gains). Earned income is commonly known as W2 earnings and is taxed. Otherwise, capital gains are considered UN-EARNED INCOME. Hope this helps a little.
So if I own a CME IOM Membership as a Individual/Sole Proprietor trading my joint account with wife from home I can decide not to elect trader status and not write off expenses so I don't have to pay self employment taxes (FICA) or taxes on capital gains as ordinary income? I could still be classified as a investor and pay only capital gains tax on 1256 contacts (60% long term and 40% short term)? The reason I am cofused is because of the below i read online somewhere: Definition of a Commodities Dealer 1258(d)(5)(B)(ii) Commodities Trader. — The term ‘commodities trader’ means any person who is a member (or, except as otherwise provided in regulations, is entitled to trade as a member) of a domestic board of trade which is designated as a contract market by the Commodity Futures Trading Commission. Commodities Dealer information The commission income of commodities and options dealers is ordinary income. Futures contracts and options traded by commodity and options dealers are generally called ” §1256 contracts” for tax purposes.Gains and losses of a commodity and options dealers from trading §1256 contracts are treated as capital gains and losses, and net capital gains are treated as self-employment income for FICA purposes. Someone please clarify for me? Thank you, Rick
Just because you have a membership does not automatically qualify you as a full-time TTS trader in the eyes of the IRS. That would be pretty nifty though... have a great year making a single multi-contract trade, lease a membership for a month or two, automatically gain TTS, and beat those cap gains into NOLs, with frontward and backward carryover. Yea baby! Additionally, you mention you trade a joint account. Unless the titling of your account matches the titling of your CME membership, you have a potential problem that is perhaps more a legal technicality than tax oriented. That's one for your broker. Also if you receive any official tax documents regarding the CME membership, separate and in addition to any 1099 from the broker, that could affect your options. But as a general rule, as you said... "I can decide not to elect trader status and not write off expenses". Especially since it's in the IRS favor... investor vs TTS is in IRS favor all the way! You sound like an average joe. That's not meant as a slight. If you are trading full time, and the money involved is substantial, you should seek paid professional advise.
I own 12 memberships. I'm not going to compete with the misinformation here. If you want better answers PM me and I'll send you my phone number.
Read the IRS code and relevant forms and instructions (Form 6781 and Schedule SE of Form 1040). Section 1256 gives all futures traders 60/40 treatment. Section 1402(i) makes the futures profits of members of futures exchanges subject to FICA tax. Income defined as self-employment income for purposes of section 1402(i) does not redefine the income from its nature as capital gains. Normal FICA tax rules apply for exchange members. Social Security tax of 6.2% (double for self-employment) is capped at income of $127,200 for 2017. Medicare tax of 1.45% (double for self-employment) has no cap. Note that only futures profits of futures exchange members is subject to FICA tax, profits from other capital transactions (stocks, bonds, real estate) is not subject to FICA tax. The tax rules applying to members of futures and options exchanges are very specific and are different from those that apply to members of securities exchanges. The people posting here about futures exchange membership and trader tax status have no clue what they are talking about.
OP, this is right on the money. EVERYBODY ELSE (except Garachen) please stop giving tax advice when you don't know the rules.