In 2000, I traded for just 1 month (December), mostly swing trades. I had several family members and friends that were investing with me. When it came time to figure taxes, I decided to file the easiest way I could...my profit wasn't large enough that penalties for filing incorrectly would have killed me, and I just didn't want to try and figure out how to do everything the 'right' way. What I did was to take the amount I profited, subtract from that the portion due to friends/family + expenses, and pay tax on that income. I did this on a schedule C. I also included a list of all my 'investors' along with their SSN's, and the $-value they made. I also paid social security on my personal profit amount. I did not include a ScheduleD, I figured if I got audited that would be the time to submit it. This year I'll have 12months worth of trading, but other than the substantial increase in activity, everything has remained the same. My question is whether or not I can file in the same 'common sense' manner as I did last year. I was initially told by a friend that this way was not correct, and if I were to get audited I could expect a hassle of biblical proportions. Since then, nearly everyone I ask says that there shouldn't be any problems with it. So...is the increase in activity likely to get me flagged for an audit? And if I do get audited, will this "well, i may not have filled in the right forms, but I paid tax on every dime I earned and I wasn't trying to cheat anyone" explanation hold water, or will I just be screwed? Any comments are welcome, thanks.
You may end up with more than IRS problems with your current methods. You are essentially trying to run a "hedge fund" without filing the proper paperwork. When you let the IRS know about the other people (with SSN's no less), you alerted them to this fact. I rarely (if ever) suggest getting professional advice, but in this case you should. If you were to do it over again, you would simply borrow the money, with a preset interest rate, and then give a bonus for profits in excess of the interest rate. You would simply deduct the interest paid (or profits) seperately. The "investment club" approach is another alternative. In any case, good luck!
i agree with Don, talk to an accountant.. when the IRS gets your account summary from your broker it only shows the Sell transactions.. they have no idea where you acquired the stock, if you paid for it, inherited it or whatever.. so if you dont file a proper Schedule D then they will start asking questions.. -qwik
You may save money by going to an accountant. First, you shouldn't be paying self-employment taxes, except in unusual situations, so a professional can steer you in the right direction. Second, a simple partnership created with a canned partnership agreement from a legal softare program should suffice (although you're at risk of a sub-par legal agreement). Then file a 1065 each year allocating the capital gains to each partner on a K-1. Then the Schedule D is filed with the 1065. But if you are going to do this going forward, get good advice from a knowledgeable Accountant/Tax attorney, and get off to the correct start. There are many advantages you won't know about if you do it yourself, so the savings of doing it yourself might actually cost you. Kmart approach = Kmart results.
I agree with the others, you definitely need to seek out some professional advice. As someone pointed out, the IRS is going to get a copy of your 1099 reporting all of your sale transactions. They are going to want to match this data up to your Schedule D. Beyond the IRS implications of what you are doing, you may also have some SEC issues to deal with. Hopefully, someone who knows more about the SEC regulations than I do will respond. But, I was under the impression that certain regulatory filings must be made when you are trading other people's money. You may even need to be licensed; but I am not sure. I know that some states get involved when you go out and solicit other people's money, so you may have an issue with your state, as well. I think Don Bright is correct when he offers the advice of starting an investment club. You may want to consider forming an investment club if you are going to continue to do this. Best of Luck!
professional advice for all this trading? I've talked to 3 accountants in Atlanta, they say the same thing... "Talk to a professonal!" SEC type accountants may be $500.00/hr and up. Who wants to pay that. I think what ends up happening is we just let our local accountant do his best, we take our legit expenses, pay out the taxes, and go with it. If anyone knows an accountant that can take a phone call please let me know
one of the best source of info doesn't have to be expensive.Speak to local college profs,go to the business/finance dept and ask if they know a retired enrolled agent.These are the "experts"from within the IRS.They will be able to direct you to the answer if they don't know.And should be resonable in cost.