Once again, I'm doing my taxes last second (on an extension)....oh...I never learn. Some info: I elected Mark to Market back in 2009, so all my stock trades go on Form 4797 and my futures and Forex go on Form 6781 (1256 contracts). My Schedule C is for writing off expenses only (subscriptions to news services, exchange fees, home office, etc.). I am quite aware that traders do not have to pay self employment tax. Everything is fine except that I got a 1099MISC from Google for 2012. $3K income from placing ads on my YouTube videos. It's my understanding I have to file a Schedule C for this and pay self employment tax. Upon reading the instructions for Self Employment Tax (Form SE), it says to "combine" the amounts from all Schedule C's (one for trading, which will always be negative since it's all expenses, and one for Google's payment). But this doesn't seem right if one of my Schedule C's is non-standard as it will never show income! So the expenses from my trading easily offset the $3K earned from Google. In this case, do I still file the SE? it's only about $320, so I'm thinking about just paying it. Any advice from other traders who may have other income on a Schedule C and how they treat self employment tax?
From IRS Pub 334, pg 44 More than one business. If you have more than one trade or business, you must combine the net profit (or loss) from each business to figure your SE tax. A loss from one business will reduce your profit from another busi- ness. File one Schedule SE showing the earnings from self-employment, but file a separate Schedule C, C-EZ, or F for each business. Example. You are the sole proprietor of two separate businesses. You operate a restaurant that made a net profit of $25,000. You also have a cabinetmaking busi- ness that had a net loss of $500. You must file a Sched- ule C for the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing your net loss of $500. You file Schedule SE showing total earnings subject to SE tax of $24,500. I will not comment on your tax structure for trading.
Tiddley, thank you for the reply. That is exactly how I read the instructions for Form SE. However, my Schedule C for my trading will always show a loss since it only lists trading expenses. This was per the mark-to-market instructions. So even if I make money trading, this Schedule C will show a loss. It seems unfair to offset this loss with my other Schedule C for my Google adsense income when determining income for Schedule SE! But as the instructions say, you have to combine all Schedule C's in calculating self employment. This is where I have doubts. Feel free to comment on my taxes. I'm always open to learning more.
It seems a little disingenuous to report negative earnings for your trading when you are (I presume) making money. One technique that is used is to shift earnings from your Form 4797 (or other trade areas) to cover your expenses from your business so your Schedule C shows a $0 gain/loss. I would think this technique would make more sense in your situation - i.e., you would only consider the $3k by itself when determining your SE tax. I would think just vanishing the $3k into your trading expenses for SE calculations when trading is not supposed to be involved in SE calculations would be erroneous.
sprstpd, I completely agree. And I do want to pay my taxes. But how do you just "transfer" a portion of your 4797 to your Schedule C without confusing IRS? I don't just want to make my own rules in preparing returns. I certainly don't want to raise any red flags either which may further my chances of an audit. This is why I'm stuck!
With one day left to file, you're on your own. Going forward, I suggest you pick up Greens Trader Tax Guide and read it. http://www.greencompany.com/Traders/Guides.shtml "Electing" MTM by itself does not qualify for trader tax status which is what you are doing. Based on what you've posted, consider yourself lucky you weren't audited for 2009 (sans a special exception).
In your current situation (with your time deadline) I would probably keep on reporting how you were doing it before, but just totally disregard your trading business in terms of Schedule SE calculations. So just list 3k as your income for SE purposes. You can make a note somewhere to the IRS that trading gains should not be included in SE calculations and that is why they aren't present. Having negative earnings for a business many years in a row is also a red flag to the IRS. As stated before, it might be worthwhile for you to pick up a GreenTraderTax guide for future years.
Thanks for the link. I'm going to purchase this and use it for next year. However, why wouldn't I qualify for trader tax status? I trade on a full time basis and it's my only source of income.
Trader status is determined on a case-by-case basis, and there is no safe harbor. Your situation would seem to qualify, but it could be challenged for any number or reasons. If challenged, you would have to fight the IRS or risk paying additional taxes and penalties and losing your mark-to-market election.
Agreed. Most of the cases I have studied pertained to those who attempted to offset some other significant income with trading losses. It's my belief the IRS does not pursue anyone due to errors if the resulting recovery amount isn't material. A few hundred dollars, even with penalties and fines assessed, is not worth their time to audit a complicated return. Those resources are better used on tax returns that can yield them higher returns. I'm not too worried, but still want to do my taxes accurately. I would hate to go through the headaches of an audit.