Short term Capital Gains vs. ordinary income

Discussion in 'Professional Trading' started by bigb, Feb 26, 2009.

  1. bigb


    Obviously going to talk to a cpa when i meet with him but was just wondering if anyone has dealt with this:

    First, I only trade the es (section 1256 contract), however this situation would apply to anybody with short term capital gains. I also do not elect to be classified as mark to market by the IRS as I would lose the tax benefit of trading 1256 contracts.

    I trade a personal account that profited 767k in 2008. I started to trade a small pool this year for family in which I made 52k for the year in fees. The 767k will receive tax treatment as 1256 contract capital gains and the 52k is ordinary income. This means for my personal account, $306,800 are short term cap. gains taxed at my tax bracket rate, and $460,200 are taxed at 15% long term cap. gains rate.

    My question is this: My understanding is that capital gains are "stacked income" and cannot be used to increase your tax bracket. The short term cap. gains is taxed at my ordinary income bracket, which for 52k would be 25%. However, if I had no ordinary income (as I am only a fulltime trader) and only have income from running the pool, my tax bracket would have been 10%.

    Doing the math:

    Long term capital gains amount left out of calculations as it is not relevant.

    As it is with pool income: 306,800 * 25% = 76700
    52,000 * 25% = 13000 (So 39k in added net income after tax)

    If no income: 306,800 * 10% = 30680

    76700 - 30680 = 46,020

    My savings on tax would be $46,020 and the income is only adding $39,000 so by these calculations I am actually losing money by trading a pool!

    Are these calculations correct?! Am I actually hurting myself by having a job with income? Is it then idiotic for traders to have an extra job with income if they make most of their money from trading thus moving themselves into a higher tax bracket? Am I missing something?

    Thanks guys for your input
  2. "My question is this: My understanding is that capital gains are "stacked income" and cannot be used to increase your tax bracket."

    that would mean that anybody who traded and had no other income would always be in the lowest tax bracket. no such luck.
  3. pbj


    Your assumption that your capital gains do not increase your tax bracket is not correct.
  4. bigb


    ok, thanks guys. Ive got it cleared up now. What i misunderstood is that capital gains do not push the tax braket rate up on your ordinary income before capital gains, but they do push it up when determining the short term capital gain income.
  5. Shit, nic eincome you made last year, wth do you trade? or short?
  6. bigb


    thx. only es for a few years now..... found my niche (edge) scalping and havent looked back.
  7. What is es?

    I trade all sorts of stock, only started a year ago and have taken many losses through out the year and hold paper losses. In the end, I traded almost $4,000,000 worth during the year and have only made about $12 after factoring in realized losses. I do this P/T with a P/t teaching job and stay at home with the kids and the wife make 80K/ year. So far this year I'm doing well and predict a good year. SO I wonder if I could benefit doing M2M