feel free to ask Green about it. see reference to original IRS link above read more from links on first page to get an idea what trader status and M2M accounting gives you. main benefit of all this is ability to write off losses(not 3K per year when you file in your personal taxes) and wash sales(dunno what you planning to trade)
First off, you only have $20K. Prove your system works first. Whatever returns your system generates will most likely not compensate you for the time, money, and complications you introduce pursuing biz structure/tax savings. Build the business first, then worry about maximizing tax savings/minimizing liability and exposure once you're system generates significant returns consistently. Consider it "exploratory" R&D to prove the idea is feasible... Afterwards, there are 2 vendors who specialize in trading taxation - Green CPA and one other. In the US, you do not need a tax specialist in your own locale. Any reputable specialist who's accessible via phone/email/fax is the best choice, not the local H&R Block or tax return processing practice. Regarding LLC, always try to find a 2nd person (for example, gift your SO, parents, or siblings a 5% interest) so you qualify as a partnership and qualify to file Schedule E and Schedule K-1. You want to avoid filing a Schedule C. The Schedule E/K-1 combo is key. The IRS has a hard time matching E's to K-1's, so your audit risk drops to low single digits. Filing a Schedule C is for suckers - the IRS wants people to file Schedule C's because they're the uninformed low-hanging fruit they can bully and beat up. High reward/low risk for the IRS.
Futures trading profits are taxed 60/40 meaning 60% Long Term and 40% Short Term. For small retail traders worrying about tax benefits is a waste of time. Making money should be your prime focus. Don't let the tax tail wag the trading dog. Let's say you have annual expenses of $1000 you can't deduct. If you are in the 25% bracket you lose out on $250. I'd rather lose the $250 than have to pay a lawyer and CPA for a structure and deal with it every year. You just got a major tax benefit by deciding to trade futures. If you are going to be "super active", how many round turns a month are you going to do? Unless you have a decent profit per trade the exchange fees and commissions are going to eat up your account. Normally a very active futures trader would lease or buy a seat to minimize exchange fees and to negotiate better commission rates, but that is a real problem for a trader with only a $20K account. When you start making large profits you can set up a structure and lease or buy an exchange seat. Note that becoming an exchange member subjects your futures trading profits to FICA taxes.
How does the IRS know it is automated? Can't a trader claim the trades are automated but supervised? It could be argued that the trader doesn't "trust" the automation and thus requires constant monitoring of the system.
yep..i really like to know how Mr Green come up with it. i kind of know what to expect,but i would appreciate an explanation from primary source.
if you have a real job, you already have what most traders are looking for and that would be earned income. If you incorporate or form an LLC, you will get earned income which with a real job you don't need, and then also have to pay self employment tax on your "investments" which is what the IRS considers your trading account which is currently exempt. And you are right, with a 20k account, the "professional" data feeds could be a real bitch. If you are looking to attract outside investors just keep your trading account separate from all your personal investing.
All, It sounds like just keeping my trading as an individual is the best way for me to go right now. This is a silly question, but my trading profit tax liabilty at the end of the year includes the cost of 100% of my data feeds and commissions right? Up until this year, my trading profits have been miniscule so I haven't claimed them on my returns. For example, if I made 1 round trip trade Bought XYZ for $10 Sold XYZ for $20 Paid $9 in commission and Paid $1 for a data feed, My trading tax liability would be zero, right? I value all of your insight/patience!! Thanks, Brad
If you meet the IRS's definition of a "Trader" you could deduct all your expenses. One thing that concerns me with forming an LLC to trade is you would have to deal with payroll tax. If you have a pass through entity you are an employee and any salary you draw would be subject to both sides of the payroll tax (over 14%) I am not a tax accountant so take what I say with a grain of salt. From my understanding a trader that makes daily trades and derives the majority of income from trading would qualify as a "trader".