Some of you may have noticed that one of our new sponsors here on Elite Trader is Tradering Accounting. We're glad to have them on board. You should begin to see them responding to some tax questions in the boards. But starting this month and on through tax season, they'll be doing a monthly chat in our chat room. The first one is titled: Why You Don't Want to be Taxed as an Investor You can read more about we'll cover at: http://www.elitetrader.com/ch/ Please join on Thursday, October 23rd @ 4:30pm EST André
We've got the chat log up on Tax Status here. Remember, also... this is the first of 6 monthly chats from Trader's Accounting. Coming up we'll cover: Nov.: Active Trader Taxation Dec.: Passthrough Entities Jan.: Mark-to-Market Accounting and Section 1256 Contracts Feb.: Corporations and Combination Structures Mar.: Retirement Plans for Traders If you ave further questions regarding what was cover in the chat, please don't hesitate to ask them here. Jim, Joe and Dave will all be reading our boards in the coming months, responding when they can. André
Other than the ability to fund a retirement plan, are there any significant benefits to forming a husband/wife partnership vs. filing a sched C as a self-employed "Trader in Securities"? Thanks.
Hi Lindaq: Yes, there are at least two other significant benefits to the H/W partnership other than the one you mentioned of providing the ability to get earned income for a pension. The first one is a significant reduction in the IRS audit rate. According to the IRS statistics off their website, the highest audit risk of anyone/anything is a sole proprietor filing a Schedule C. The same level of business activity carried on in a partnership drops the audit risk by a factor of approximately seven (7)!! The second reason is to provide asset protection for the brokerage account(s). If you own the brokerage account in your own name, then as a general rule, there is zero asset protection. You could lose the brokerage account if you are sued. On the other hand, if the brokerage account is an asset of the partnership (separate legal entity from you), then the general rule, with some exceptions, is that the creditor's remedy is limited to obtaining a charging order. FYI--the significance of the "husband & wife" partnership/LLC is that under a Revenue Ruling issued last year, the IRS will not disregard the partnership/LLC (as is the rule for a single-member LLC) if the spouses so elect. Hope this helps! Joe Wishcamper Traders Accounting
Thanks for the reply. I wasn't aware of the "protection of the account" issue, and that alone would be worth forming the partnership.
When it comes to trading with a prop firm and recieving a K1, is there any difference in tax advantages or disadvantages???
Folks, we had another well attended chat with Traders Accounting. Here's a link to the Chat Log. It's crazy how many questions we received. We couldn't possibly get to them all. We had questions submitted prior to the chat that we didn't get to as well. This was due to some technical difficulties, that left Traders Accounting with only one person responding to questions. As you can appreciate, tax code answers require a thorough response. So we didn't answer questions unless we could do so well. We saved many questions from the event, and will post many answers that were submitted prior to the event here in this thread. Please realize that if yours didn't get an individual response, that we may have had a similar question from another member, and chose to use their wording to respond to that issue. Thanks for your attendance and your patience, folks! André
I already file as a Trader using a Section 475 and Schedule C. If I create an LLC for trading and opt NOT to use Section 475 for the llc, because I am trading futures in the llc, will that confuse IRS? Additionally, should the llc be formed well into a tax year, would I be in a situation where I would be filing BOTH as a Sec 475 and as a non-Sec 475? And third, what about that Form 3115. If I am already using a Section 475, and then the llc does not use a Section 475, will I need to do another 3115 to return to the basic accounting method?
can fines given to traders by exchanges be deducted ? I do not have an LLC set up , just am an individual trader who might have to pay a fine from the CBOT exchange
Hi SethArb: The general rule is set forth in IRC Section 162(f), which says, "No deduction shall be allowed . . . for any fine or similar penalty paid to a government for the violation of any law." I haven't had an opportunity to research to see whether there is any exception to this rule for the type of fine you are confronting, but based on Section 162(f), I'd be surprised if there is an exception. If you wish to investigate this further, contact your tax advisor to research the matter for you in greater depth. But I think the answer will probably be no, it is not deductible.