I also became an exchange member recently, and have a few related questions. I'll probably end up seeking professional advice, but I'd like to hear what ET thinks... 1. But what about S-Corps? Can't I trade in an S-Corp, pay myself a reasonable salary, and pass the remaining distribution to my Schedule E? In which case, that distribution would not be subject to SE tax, since it is the entity which holds the membership, not the individual. This is basically what tiddlywinks said, except that you're setting up a corporation, not an LLC (yes, more paperwork, I know). (As a side question, any rules of thumb as to what constitutes a reasonable salary? Some people seem to tie it to a percentage of their trading income (say, 30%), but shouldn't a flat number be more appropriate and in line with financial industry standards?) 2. Let's say that as exchange members, we can't avoid the SE tax. For 2013, this means paying 3.8% in Medicare tax as part of our self-employment tax on incomes >$200k. But there's also a new law on the books for unearned income greater than $200k as well, that also calls for a 3.8% Medicare tax. As professional traders, would we have to pay both? 3. A fun hypothetical. Say I was a CME member and I put on a massive trade, long ES futures and short SPY (which for the sake of this question, we'll assume is not a 1256 contract). Over the year, the S&P 500 rallies like crazy, so I have a large trading gain in ES and a large trading loss in SPY. Would I owe SE taxes on the ES "profit", even though my net capital gains is basically zero?
I can't help with knowledge on S-corps. You will have to contact an accountant anyway, because you can't be sure any advice here is correct or up to date. Good Luck, 1245
1. A single member LLC can elect to be taxed as an S-corp in which case you could pay yourself a reasonable salary and take the excess free of SE. 2. You would not have to pay both. 3. Your gains and losses generally are netted together. You would not owe SE tax if your net is zero.
Never get tax advice from a forum. Only get it from a tax professional. If your tax professional isn't well versed in trading find a new one!
Trading gains are not subject to SE tax, with one exception. A futures trader with a full membership on a futures or options exchange. Section 1402i. It doesn't matter if you claim trader tax status or not, use an entity or not, or elect Section 475 MTM or not. Trading gains trigger the ObamaCare 3.8% Medicare surtax on unearned income starting in 2013. But only for upper income taxpayers.