kooltrader, It is not simply a matter putting a number on line #13 vs. line #12. The values on these lines tie into amounts on Sch C and Sch D, which in turn must be prepared correctly and tie back to their source documents. If you are a bona fide "trader" for IRS purposes then there are tax deductions allowable, but you need to know the law and how to apply it and then report the results properly on your tax return. If you are not "in the business" enough to qualify as a trader, then Sch A is used rather than Sch C. In fact the trading gains for traders as well as for investors are exempt from self-employment tax, per a long history of statutary law. Dealers are subject to S/E and they use Sch C to report the gains, unlike traders or investors.
IRS Tax Topic #429 (http://www.irs.gov/taxtopics/tc429.html) covers filing as an individual trader. Being a daytrader does not automatically give you trader status. Both traders and investors (but not securities dealers) report gains on schedule D. Investors report related expenses on schedule A, and traders report necessary business expenses on schedule C. Section 475 (market-to-market accounting) election is optional. IMHO this stuff is not as complicated as many people claim. There's just a lot to it.
all theses responses bear out ll the confusion of filing taxes s a traders all these years later. #1the irs has stated only that to be considered a trader one must derive a substantial amount of his income from trading and be a active day trader. green and company described that as at least 3 round trips a day. the reason the poster got a letter from the irs is very simple. one only moves the amount of income from sch d to sch c to zero out your expenses so if one had 140k of sch d gains and 15k of sch c expenses he simply shifts 15k from schd to sch c so the net profit on sch c is zero. the reason this is done is because a trader pays no social security taxes so sch c must be zeroed out . even though i can do my own taxes i've used green and co for 6 years as they use tons of footnotes to explain everything. i sugguest if one uses another accountant buy there example tax retunrs to give it to there accountant
kooltrader, if you're significantly profitable and don't have lots of expenses relative to your net profits, it's often the best to treat your trading as schedule D. What I mean, just forget about the relative small deductions you might have gotten as a MTM trader. Especially, if you trade futures, where 60% of your gains are taxed at the long term rate. that is simply unbeatable, imo.
I would like to Thank the Thread Author for this thread. I am one of those traders who does my own taxes. During those slow days, I always try to read up on the recent tax law changes. I find the IRS publications, surprisingly helpful. Get your rules from the horses mouth. I had an audit on my 2003 taxes and because I knew the rules I was able to win in Tax court. It was concerning a traditional IRA exemption. I am a firm believer of giving the IRS a little to keep them off my back, but at the same time tax returns should be able to be prepared by anybody. Stay away from questionable areas and just evaluate how much benefit you can derive from it. Weigh it out and do not be afraid to pay a little tax! Michael B. P.S. I find that the knowledge that I learn about the Tax rules guides me in my "other" investment decisions and strategy, besides trading. Those "nuts and bolts" I feel are necessary to learn by any serious businessman, instead of buying into the brainwashing of using an accountant, CPA or Tax preparer. Do the time, don't be lazy and understand as much as you can. There is no excuse for detail oriented, profitable traders to avoid tax issues and assign the knowledge to another. This is one of those issues where a trader should spend some time in. P.S.S. For those of you with a lot of deductions. Take a three hole binder and take a stack of blank paper and put in it. As you collect your receipts in your shoebox, make sure you number them and copy the thermal transferred ones in your laser printer, then staple them to your blank sheets of paper, several can go on one. Break out your Excel program and enter them in one by one according to the number you assign to them once a month. After a while you get accustomed to this and its no work at all and becomes a part of your routine. Put a shoebox in your car too...
you're implying the trader got deductions just because he was an mtm trader thats incorrect. wether filing as a regular trader or mtm trader one can still fill a sch c for all his expenses i'm a firm believer if one has one penny of expenses he's due legitimately take it. if trading is your sole source of income take it. mtm is simply taken to void the wash sale rule and to be able to carry back losses and not be subject to the 3k limit. if one has carry forward loses from the bear market i'd tell them don't file mtm till you exhaust all your losses with gains
Page 72 of IRS Publication 550 addresses special rules for securities traders. http://www.irs.gov/pub/irs-pdf/p550.pdf