Summary: Learn the mistakes traders and tax preparers make before planning and filing taxes, and how to avoid them. By Robert A. Green, CPA Trader tax laws and benefits are complex and nuanced. Far too many traders and tax preparers donât know the laws or misapply them on tax returns. Why pay tens of thousands of tax dollars more than you should? Itâs wise to educate yourself before risking your capital and itâs wise to do the same before planning and filing tax returns. To help with the latter, Iâve assembled a list of the most common mistakes made by traders and tax preparers. Read Green's Top-20 List http://www.greencompany.com/blog/index.php?postid=187 WHAT'S THE BIGGEST MISTAKE YOU'VE DONE OR SEEN ON TRADER TAX RETURNS? Webinar series related to this blog. Trader tax compliance/preparation: Key updates on 2012 tax return filings and 2013 tax planning - Part II (watch the Part I recording). http://www.greencompany.com/EducationCenter/InteractiveSeminars.shtml Excerpt: Big picture items 1. Not claiming trader tax status, business expense treatment. (Or claiming this status when not entitled to it.) Business traders can save an average of $5,000 or more using business expense treatment. Business expenses are 100% deductible from gross income, whereas investment expenses are considered miscellaneous itemized deductions and are only deductible âbelow the lineâ in excess of 2% of adjusted gross income (AGI) and added back for the Alternative Minimum Tax (AMT), also known as the nasty second tax regime. Business expenses allow home-office deductions, education expenses, and startup costs, whereas investment expenses do not. Also, traders may claim trader tax status after the fact, including on amended tax return filings for the past three open tax years. 2. Not filing the Section 475 MTM ordinary loss election on securities and getting stuck with the puny $3,000 capital loss limitation, wash sale loss headaches, and extra tax costs. Many traders and accountants mishandle the Section 475 election statement (due by April 15 of the current tax year for existing individuals and partnerships) or they botch perfecting the election on a Form 3115 filing. One mix up can jeopardize ordinary gain or loss treatment. The biggest pitfall for traders is not deducting trading losses when they otherwise could. Section 475 does not apply to segregated investments or Section 1256 contracts when elected on securities only. Unfortunately, you canât fix a missed or botched Section 475 election; you need to focus on climbing out of the capital loss carryover hole you dug. You can form a new entity and use the ânew taxpayerâ exception allowing an internal Section 475 election within 75 days of inception. 3. Making the wrong decision about the forex Section 988 opt-out election and reporting forex incorrectly. Spot and forward forex receives Section 988 ordinary gain or loss treatment (which generally is better than a capital loss limitation). At any time during the tax year, traders are entitled to file an internal âcontemporaneousâ opt-out election to have capital gains treatment instead. Thatâs helpful if you have capital loss carryovers. If you trade in major forex currencies and donât âtake or make deliveryâ of the underlying currency, the opt-out election subjects forex forwards â and we make a case for spot forex too â to the lower Section 1256(g) 60/40 tax rates. That reduces the highest tax rates by 12%! Forex reporting depends on whether you file the Section 988 opt-out election and whether you qualify for trader tax status. Section 988 without trader tax status is line 21 of Form 1040, and with that status its Form 4797 Part II. Section 988 losses over $50,000 require âtax shelterâ Form 8886. Many IRS agents are confused over tax treatment for spot forex, plus forex brokers arenât supposed to issue 1099-Bs for spot forex. Make sure to read brokersâ tax reports correctly. For example, rollover interest is part of trading gain or loss. If you opt-out of Section 988 and choose Section 1256(g), use mark-to-market at year-end on Form 6781. Thankfully, summary reporting applies on forex. 4. Business traders not forming a trading entity to unlock AGI deductions for retirement plans and health insurance premiums. These AGI deductions can save $2,000 to $17,000 or more in taxes, but sole proprietor retail traders canât get them in connection with trading gains. By forming a simple pass-through entity like a partnership, LLC, or S-Corp, business traders can take advantage of these deductions.
My Forbes blog version: Ways Professional Traders Can Save Big At Tax Time http://www.forbes.com/sites/greatsp...rofessional-traders-can-save-big-at-tax-time/ What tax mistakes have you made or seen other traders make? Let's have a discussion about it.