Guys, check this FAQ out: http://www.tradersaccounting.com/faq_answers.php?id=2 Seems like filing as an entity could be the way to go? I hope to get this sorted out in a few weeks... *** What is the best structure for tax savings? You have three options. One is to keep filing your Form 1040 (U.S. Individual Tax Return) year after year. That is the most expensive solution and unfortunately, that is what most people do. Next, you could try to file as a "trader" and deduct your business expenses on Schedule C of your Form 1040. This is risky and does not offer you any income tax strategies, so we advise you to stay away from this option. The third strategy is to place your trading capital in a legal entity. There are various entities that may be appropriate, depending on your situation. Your main choices are the c-corporation, the flow-thru entities such as the limited liability company (LLC) and the limited partnership, and a combination of a c-corporation and a flow-thru entity. The following is an explanation of the corporation - LLC strategy for active traders. This strategy can allow you to legally write-off your computers, home office equipment, all educational expenses, and a large percentage of meals, entertainment and travel. You will learn how to run your investment activities as a qualified business, and how you can grant yourself all the legal perks, benefits, tax breaks, and tax deductions afforded to large companies. The Limitations of Filing a 1040 Tax Return as an Investor As you probably know, when you file your Form 1040 tax return, your ability to deduct expenses related to your investment activities is extremely limited. Certain expenses are deductible, but these itemized deductions are subject to the 2% of adjusted gross income limitation. Additionally, deductions for investment seminars and home offices are categorically disallowed. Another limitation affecting more and more investors is the Wash Sale rule. This rule prevents you from realizing losses on securities sales if you are in basically the same financial position in a 61-day window of time. The goal of the IRS is to prevent you from selling a position simply to record the loss, and then immediately buying back the stock at a lower basis price. Unfortunately, with active trading being more the norm, individuals often find themselves moving in and out of the same stock within the same 61-day window. One benefit of filing a Form 1040 tax return is the capital gain treatment of your long-term stock positions. If you hold your securities for 12 months or longer you can lower your capital gains tax bracket to as low as 10% or 20%. In conclusion, if you work at a full-time job and are realizing capital gains in the stock market, you do not have any powerful methods for offsetting your tax liabilities. In fact, all of the expenses incurred in learning how to grow and manage your capital are almost entirely non-deductible. But what if there was a way to make your investment activities into a business? What if you became a qualified money manager in your part-time? Do you think that you might receive a preferential tax treatment by the IRS? Let's see: Filing as a "Trader" on your Form 1040 Tax Return ⦠tax breaks but very risky This tax strategy boils down to this: You convert your investment activities into a trading business. Once your investing is recognized as a business, you are able to deduct any ordinary and necessary business expenses. What does it take to form a trading business? The Internal Revenue Code is conspicuously quiet about how to qualify as a trading business. So, the burden has been placed on brave individuals who filed their 1040 tax returns and attempted to establish themselves as "traders" in order to write-off their business expenses. Most of these individuals were slaughtered in the tax courts. In case after case, the individuals were rebuked by the courts. The net effect of the rulings is that it is nearly impossible to qualify as a trader. To qualify, you would most likely have to be trading full-time, hold your positions for less than a day, and trade a large amount almost every business day throughout the year. In essence, the court has said, "If you are not on the floor of the exchange, or holed up in a trading room, you do not qualify." Some CPAs have been very active in promoting "trader status" filings. If you look at the actual text from the court cases, you will agree that attempting to establish your trading business as an individual trader on your personal Form 1040 tax return is a risky proposition and can lead to sleepless nights worrying about a possible audit. The bottom line is that while a very small portion of active traders can realize substantial tax savings by filing as a "trader", a majority of investors do not qualify and need an alternative strategy. The Complete Solution: Placing Your Trading Capital in an Entity Structure Instead of attempting the herculean task of qualifying as a "trader" on your personal return, there is a method of qualifying that is automatic, trouble-free, and positively overflowing with powerful tax benefits. This strategy is what business greats like Warren Buffet, Michael Dell, and Michael Bloomberg, along with tens on thousands of others, have chosen for their investment capital. Advantages of Using a Corporation One of the most exciting things about using a corporation is the sheer amount of tax deductions and perks that are available to corporate owners and company employees. Congress has created tax laws and special exemptions for corporations. It is the lobbyists of the major corporations that have paved the way for you. Now, you can own your own corporation and be able to write-off all "ordinary and necessary" business expenses, fully deduct the costs of attending board meetings that are held in vacation areas, write-off all medical expenses with no limitations, contribute up to $40,000 to your own pension plan, and much much more. For individuals that are generating a large amount of excess revenue, the corporation structure allows you to start-up additional businesses with the expenses of the new business offsetting the income from the trading business. Another great benefit of the corporate entity is that it is a perpetual entity. Many individuals choose to retain the controlling interest in the corporation, and gift the non-controlling stock to their beneficiaries early in the growth of the business. That way, all future growth occurs in the estate of the beneficiaries, so that when you pass away, your beneficiaries do not need to sell off your business simply to pay the taxes. All they would be receiving is the small amount of controlling stock. Taking Action If you are a part-time trader, you have created a situation where you can take advantage of major tax strategies usually reserved for individuals with full-time businesses. It is simply a matter of getting started. We are the experts in this arena. We can look at your situation and show you how the entity structure would work in your situation.
You need to spend time at www.greencompany.com and understand their tax law guides. If you are trading fulltime, and do so almost everyday throughout the year - there is no question on the qualifying for Trader status. Your quote above "If you are not on the floor of the exchange, or holed up in a trading room, you do not qualify." is just bunk and frankly invalidates the article for me. It is highly biased piece implying almost noone can qualify for trader status who trades from home.
I know I qualify for trader status. I just wanted to know the best way to file my taxes, not just how to file my taxes, to take advantage of my current status. This will be my first full year trading, hence, my quest to get a CPA to help me out. And yes, I might be contacting Green and/or several CPAs specializing in trader tax. Thanks to everyone who's contributed to this subject, it has immensely helped.