This is important to those of us who make this declaration on our taxes. Green does my taxes, but this is not an endorsement. Rather than paraphrasing and implying my writing is original, I posted the link for accuracy. http://www.greencompany.com/blog/index.php
I haven't used their service, but their book is gold. Tax Guide For Traders, I can't imagine trying to be a trader in the IRS' eyes without having reading it.
The Holsinger case denial of trader tax status is clearly justified by the facts. "After studying the Florida couple's records, Judge Vasquez decided that their trading activity wasn't substantial. He said they traded on only 63 days in 2001 and 110 days in 2002. "We find it doubtful whether the trades were conducted with the frequency, continuity and regularity indicative of a business," he concluded. The judge also ruled that the couple failed to prove they were trying to capture daily swings in the market and to profit from them. A list of their trades shows "they rarely bought and sold on the same day," the judge said. Furthermore, he said, a significant amount of their holdings was held for more than 31 days." And they lost money in both 2001 and 2002. They should have just filed regular tax returns and lived with the tax loss carryforward. If you want to have trader tax status and avoid trouble with the IRS just trade every day and make money.
This topic has interested me for a while. I know people--myself included--that trade far fewer days and make far fewer trades, and make a great deal of money and do this on a full-time basis with no other personal source of income. Even though a multitude of trades aren't executed on a daily basis, one still needs to monitor (this is still work) the market all week from open to close. So, what is substantial? I think that if you show a consistent profit, the IRS will leave you alone--no matter what entity you use or how much you trade. I trade futures options, so I automatically have the advantage of MTM accounting and the 60/40 rule--this is IRS law. Only disadvantage is that I cannot get a full writeoff of all my business expenses (limited by Schedule A) nor can I apply a yearly loss all at once (limit is $3K per year). I was thinking of an idea. I can create a management company that will manage my personal account. This management company will meet NFA/CFTC regs. The management company can write off all business expenses. I will write a personal check to the management company that will incidentally cover the expenses. This check is the management company's sales per schedule C. The management company appears to have no profit. Then, on my schedule A, I will enter the amount paid to the management company. Of course the write off will be limited, but it is higher than it would be otherwise. Even if I have a loss in my trading, I can still write a personal check to the management company as before to zero out my business expenses. I can still report that amount on my schedule A, and I can deduct up to $3k of capital losses on my 1040. If anyone sees a flaw here, I appreciate any constructive criticism.
heres the nice loophole to beat this IRS bs. have two brokerage accounts. when you are idle in your trading and are worried this could look bad buy ES in one account and short SPY/YM in the right quantities in the other, try to make some kind of profit out of this, whether it happens or not its irrelevant. close the trade by the end of the day, if asked about it say you were trying to do an spread trade or arbritage which is true. it says 'trader status' not 'winning trader status'
I started by own LLC, and all my trading and expense accounts run through that LLC. Never any problems. I wouldn't be concerned about any precedent here, because truth be told the IRS probably should have gone after these guys. The big threshold is that you have to be able to prove that you trade for a living. I wouldn't worry about the number of round turns - I've never had an accountant make that an issue. The IRS just threw the kitchen sink at these guys, especially since they didn't have any credible legal representation. Bottom line - always file a return, and always pay your taxes.
The problem here is the differentiation between investing for a living and trading for a living. For whatever reason, the IRS seems to believe that only multiple trades opened and closed every trading day constitutes trading for a living. If you take two traders who have no other income but trading, watch the markets all day every day, and do everything else the same except that one trader is an active daytrader while the other trades a few times a week with overnight trades then one is a trader and one is an investor. In my opinion this is ludicrous and if properly challenged in court the IRS would lose but it is important for people to be aware of where they stand right now. As others have mentioned, if you make money and pay taxes you are much less likely to get audited then if you claim trader status, make money for a year or two, then have a large loss and want to claim a big refund.
You can avoid all this hastle, trade futures................. you pay lesser taxes on gains as well than stocks
I'm not sure, but the IRS might consider this practice "self dealing". Individuals could use a similar practice to transfer capital into a qualified retirement account.