I am a little confused about the status of a day tarder when it's about IRS. I filed my profit as gain capital ( I didn't have loss) and deduct some expenses such as gas, trips, meals etc under a business, but I didn't pay self-emplyment tax and now IRS asked me to file Schedule C and SE(the self employment tax). In fact I filed Schedule C and I wrote down the gain amount on 1040 on line 12, which is the business profit/loss and because of that IRS wants me to pay self-employment tax. Should I have written it on "capital gain" section instead? If this is correct, can I deduct expenses if I declare capital gain/loss instead of business profit/loss? Thanks
My quess is there's probably more than one answer necessary, and it's probably best to do some research "Google" and/or contact a group that specializes in "Trader Taxes". I had good luck with Green and Company - they offer a "how-to" package and will also prepare your return and/or provide consultation, depending on your needs: http://www.greencompany.com/Traders/TraderTaxPrep.shtml IMO - Trader Tax preparation is not terribly difficult, but it's imperative to get things right from the start (FWIW: You don't want to get a bill from the IRS for $500k like I did...fortunatly my records were in order and the issue was resolved painlessly, but that's the risk of a mistake).
If you reported your trading net gain on a sch C, then you did not file your "profit as gain capital." "Capital gain" does not go on a Sch C. If you filed as a dealer, then you probably filed the sch C as required, and you'd owe the S/E tax. Assuming you are not a dealer, then your return was prepared incorrectly (a common situation with trader tax returns, so don't feel too bad) and you now need to address the problem. Having made one error (that was caught) means that it is still possible that there are other errors in the preparation of the original tax return. One way to cure this is to file an amended tax return in response to the IRS inquiry.
You should have filed your stock trades on a 4797, then take your expenses on Sch C. You also need to file a form that is Change in accounting method to declare yourself a daytrader. Traders are exempt from SE tax. Hope this helps. You would have to file the change in accounting method form in 2004 before April 15 to declare yourself a daytrader for 2004.
Actually if you never filed the change in accounting method you need to amend the return and put your trades on sch D
Traderstatus, I've filed sch C to deduct some expenses and sch D, capital loss/gain to show the profit I made. When I reported the profit on 1040 I wrote it down on line 12 and IRS wants me to pay self-employment tax. Now my question is if I could write the profit amount on line 13 , which is for capital loss/gain, and still use sch C to make the deductions from the business. What I don't understand is that if I file sch D (capital gain/loss), can I still deduct business expenses? Thanks all for the answers.
Isn't form 4797 used for wash sale kind of reporting? I did send the change in accounting method to IRS before April 15th. Thanks.
I've filed the change for 2005, because I started trading in 2004, but I reported the trades on sch D. I was able to do that because I didn't have loss. It looks to me that the mistake I made was writting down the profit on 1040 on line 12 instead of line 13, which requires me to pay self-emplyment tax. Anybody agrees with ? or not ??? Thanks.
Sounds like you want to have your cake and eat it too. Tax system does not allow that. Deduct your meals and gas? That's for a ''real'' business. If you want that deduction as a self-employed person, then yeah, you have to pay the self-employment ''social security'' tax. Otherwise, claim it as capital gains and forget about your bullshit, made-up deductions.
Thanks ricktaker, That's what I thought after I read some of the posts, but it was too late, after IRS aske me to pay self-employment tax