Hello all, Making a lot of money through short term options trading and I've gone well over my tax bracket. Expecting roughly $130,000-$150,000 after losses in 2018 so I need to do some tax planning for the future. Looking at the IRS requirements I do not think I would pass their requirement for "trader" status. I trade short term options that are almost always kept open for over a week and some days I do not trade at all as I do not force moves. Looks like IRS is looking for a literal day trader which is not me. I would like to however benefit from the elimination of the wash rule and the annual 3,000 capital loss. Seems like the mark to market election (which is an option for those that have "trader" status) does that by converting capital gains and losses into ordinary income. If I understand this correctly this means that ALL of my short term losses can be netted against ALL my short term gains, regardless off wash rules. Sounds great to me. Reading online it sounds like forming an entity is an easy way to obtain trader status since I cannot get it at the personal level due to my style of trading. The question is can a single member LLC which is viewed by the IRS as a "disregarded entity" choose mark to market and will it be honored by the IRS? Reading online it sounds like a "disregarded entity" is completely ignored by the IRS for tax purposes, making me wonder if an SMLLC that elects mark to market is honored. If it is not honored by an SMLLC do I have to do a non single member LLC or choose an SMLLC but choose to be taxed as say an S-corp (I believe an SMLLC that chooses to be taxed as an S-Corp is not viewed by the IRS as a "disregarded entity." However, an S-Corp complicates things and it also has a 1.5% tax here in California so I'd like to stay away). My head is spinning from reading about this topic (so much ambiguous info out there). Any insight or help is greatly appreciated.
This question has been asked numerous times here. You can't rely on the advice of members here for those issues. My advice is to contact someone that focuses on this business and has knowledge of current tax rules and how they might change in 2018. https://www.greentradertax.com/
Do not be cheapskate! Take some of that money you made and go see an accountant who specializes in such matters. And remember that the IRS investigator is like a Pit-bull dog, when he bites, he never let go! Good luck
I looked into that too. If you only trade your own funds, IRS's guideline is strict and unless you day trade, hard to qualify. My accountant is still looking into it. I asked him the other question: What is the minimum I need in order to qualify? On the other hand I wonder what if you also trade for friends and family? What if you also invest for others?
Contrary to what some say, you can rely on some of the members advice, especially if they are CPA's and traders, which I am. I will address some of your issues here. However, I invite you to my website, www.optionstaxguy.com, which addresses almost every question you have, and its free (and in the process of being updated). First of all, there is no such thing as IRS "trader status". That is simply a phrase coined by a someone many years ago and unfortunately it has stuck. The IRS classifies those who trade securities as investors, traders in securities and one can elect mark-to-market if his/her trades rise to the level of a trader in securities. One thing I would like to emphasize is that simply forming an entity does NOT miraculously transform your trading from an investor to a trader ... nothing could be further from the truth ... and if somebody is telling you that then return the book or walk away because they are what I like to call ... wrong. Even if you have an entity your trading has to rise to the level of a trader in securities. That is a facts and circumstances determination typically based on several criteria such as trading frequency, consistency (must be regular and continuous) and volume, either in number of trades or dollars. This issue is determined primarily from case law. I have a pretty extensive listing of the investor vs trader tax cases on the above-reference website. You're too late to elect MTM for 2017 because it is due by the due date of the tax return for the prior year. So, if you want to elect it for 2018, you will need to send in the election form by April 15, 2018. A single member LLC is a disregarded entity but it is not ignored by IRS ... it still files a tax return. By default, an SMLLC files a Form 1040 Schedule C, if there is more than one member then it is by default a partnership. It can also elect to be a C Corp (not recommended for a trading entity) or an S Corp. You can take a look at the Green Trader website for additional information. I lot of people swear by him and I have a few issues with some of his strategies versus what the Internal Revenue Code and Regs say. I have seen his MTM template for making the mark-to-market election and it is one of the worst templates I have ever seen. It has been a while since I have completed a CA business tax return but I recall that if you have an entity (an LLC for instance) there is still a minimum tax of $800 assessed by the Franchise Tax Board. Good luck ...