Aaron, Thanks for the detailed explanation. If you have time, could you please let me know where I can get information for what can be done legally to reduce the tax burden for an LLC running a commodity pool. For instance, I'm interested in the case of both US and foreign based investors, if this pool can be formed offshore? Also, can the pool be formed in a lower tax US state but operated from another state? Do you know anyone specializing in tax topics like this? Thanks again.
If one wants to trade SSF (in the capacity of a CTA and / or CPO), does this require NASD / SEC registration? Thanks.
Do you want to rephrase this statement, or does your fund eat all margin calls to make accounts "whole?"
Yeah, that's a complex issue and more than I can answer in a few paragraphs. A US domiciled LLC can elect to be taxed like a partnership, as a pass through entity. The LLC has to file an information-only return with the IRS and actually paying taxes is the responsibility of the investors. This is true for some states, also. So you'll want to create your LLC in a state that doesn't tax the LLC directly. But you also have the complication of where you operate the LLC from -- that state might have tax requirements also. For US investors investing in offshore funds, non-US investors investing in US funds, and non-US investors investing in offshore funds there are so many permutations of 1) the country of residence for the investor, 2) the country of citizenship for the investor, 3) the domicile of the fund, and 4) the country of residence of the manager that you might need a securities attorney.
SSF's are the odd bird -- half security, half futures contract. They were the motivating factor behind the Commodity Futures Modernization Act of 2000. And then they ended up not being nearly as successful a product as many expected. I believe if you are a registered CTA you can consider SSF's to be futures contracts and don't have to worry about SEC registration as an investment advisor (as you would if you start trading equities for clients). You might call the NFA to ask for sure about this. Don't bother calling the SEC. The NFA is extremely helpful, the SEC is non-helpful.
Thanks Aaron. One final question for you. With your LLC, I guess you're paying yourself some salary and thus creating earned income. So you're able to deduct health care related expenses and contribute to an IRA. Are the profits from your portion of the pool treated as capital gains, and thus be able to get 60/40 tax treatment on section 1256 contracts? Thank you.
If you invest in a limited partnership as a limited partner, the "limited" part means your liabillity is limited to the amount of your investment. You can't be sued based on the activities of the general partner (the person who manages the partnership) and you are not liable for the debts of the partnership in excess of your investment. As the general partner of the fund I manage, I could, perhaps, be on the hook for losses in the fund in excess of the fund assets. I don't intend on letting this happen. The Schindler Fund hasn't had a >100% drawdown yet and I don't plan on having one any time soon.
Hi chinook, Schindler Trading is a sole proprietorship and the Schindler Fund is an LP -- no LLC's. The management fees from the Schindler Fund are earned income -- so I have to pay FICA but I get to contribute to a solo-401k. The Schindler Fund profits, both for me personally (I invest in my own fund) as well as for the other partners, are reported to us as futures trading income on our Schedule K-1 (Partner's Share of Income, Deductions, Credits, etc.). Just like you get a 1099 from a broker, you get a K-1 from a partnership. We who are US taxpayers take the trading profits number from the K-1, put it on a Form 6781 where it gets split as 60/40 long term and short term capital gains.
Thanks Aaron for taking time to answer all of these questions. I wish you a trading year with minimal drawdown