I am looking at the instructions for IRS tax form 990-T. Now suppose I am an individual trader with a self proprietor trading business. And then I also trade actively in my Roth IRA. Am I considered a "domestic organization"? Where is the term "domestic organization" defined?
Trading is not a business. Unless someone is paying you to trade or you collect fees from a 3rd party. It is investment income as long as it is your own money. Go to town trading your IRA ... all you will get is 1099 form that is not reported to the IRS by your broker at the end of the year. I have never heard of anybody being questioned about using their IRA to "trade as a business" by the IRS. And I subscribe to the IRS warning newsletter for 5 years. Bunch of crap.
http://www.fool.com/taxes/2004/taxes040924.htm This is one of the few articles I can really understand all the terminology. It seems to imply that what I am talking about is not UBI. However, the question is, if I have a trading business (sole proprietor), does that somehow make my personal IRA taxable if I use the same sort of trading methods in it as I do in my business? Makes no sense at all. Does that mean I could create two trading methods, one solely for my IRA and I would be okay? How about a person who doesn't own a trading business and they actively trade in their own IRA. There is no business to get in the way - that can't possibly be UBI, right? Or is it the fact that trading regularly in the IRA automatically makes it a business in the eyes of the IRS? In which case, the laws for what deems "substantial activity" for trading are not set in stone either. The more that I think about this, the more that I think that the IRS would have a really tough case proving this stuff. And that makes me think it is worth the risk of hyper-trading in your IRA. The tax benefits could be enormous, while the risk of paying taxes is probably low. Reward to risk seems pretty high to me.
The firms to which I was referring (Millenium and North Star Trust companies) are not brokerages. They are trust companies who among other things act as custodian for a brokerage account. So it might be logical to conclude that they know something about trading in an IRA. I don't get where you are coming from TraderTax. I have never seen anything, EVER, anywhere, that suggests that trading with great frequency in a futures IRA account has anything whatsover to do with the subject of unrelated business income. I mean, has there EVER been a futures trader where the IRS rebutted the tax-free status of his IRA trading account? Ever? Not to my knowledge. You run a trader tax company, so does Green Trader Tax, who also gave the impression that daytrading in an IRA might be a problem. Hmmmm .... Let's see. If traders start doing moronically simple things like trading tax-free in their IRA, I guess that means less revenue in selling more complicated tax strategies to people. Call me a cynic, but TraderTax, I just don't get your point here.
Of interest to me would be a discussion by people who have hyper-traded their straight, directly owned IRA brokerage account, and how they faced the typical restrictions regarding free-riding under Reg T. Also if anyone's straight, directly owned IRA brokerage account has been classified as a PDT account by the brokerage.
This is another question. Suppose you have a trading business and you have a separate IRA that you essentially use the same strategies in. However, in the IRA you are restricted by cash account restrictions so you can't go short and you can't use money again til it settles. So in effect, the frequency of trading in your IRA is naturally muted by these restrictions. Can the IRS claim you are trading so actively in an IRA (even with these restrictions), that they can claim the profit generated is UBI? Can I not claim that since the frequency of activity in my regular account is so overwhelmingly larger than my IRA, that my IRA is not a business (in comparison)? As for myself, I have an IRA at IB and I do trade it frequently, but within the cash account restrictions at IB. So I can only turn my money over basically once every three or four days. So I can't answer your question, sorry.
Huh? First off, I'm talking futures not stocks. Secondly, if you read the posts and were familiar with how the IRA trust custodial companies work (Millenium, North Star et al) then you would know that the brokerage account is actually held in the name of the IRA custodian company not the individual. Nobody is talking about a "directly owned" account. The IRA trust company owns the brokerage account not the trader. But the trader directs the trading activity. It's called a "self-directed" IRA account. Please review the trust companies' web sites if you need more information. The links are on the first page. I have the impression that you are not familiar with these trust companies and how they work, and as such are throwing potential tax problems into these discussions, which simply don't exist. Nor do I understand why GreenTraderTax is seemingly flagging 'frequent trading' as a potential problem in an IRA account. If I am trading a perfectly legal futures (or stock) account inside an IRA which is being held for my benefit by a third party custodial company, why the eff would the IRS care if I traded 10 times a day, or just once a year? So long as I'm not routinely drawing money out (which I agree might make it look like I was drawing income instead of investing for retirement) then who cares how many times a day I trade?! Unless you can point to a case precedent where the IRS has disallowed the tax-free status of an IRA account because the investements inside the account were traded too frequently, then I can't fathom what the hell you are trying to flag as an issue here! Nor can I fathom what GreenTraderTax was trying to flag as an issue. Seems like ill-informed scare-mongering to me, traderstatus. Futures trading inside an IRA is legal. Otherwise the trust companies wouldn't exist. You have yet to provide ANY rationale for why frequently day trading the account would cause the tax-exempt status of the IRA to be a problem. When I talk apples, you respond with oranges. I have no doubt that there are occasions when people (urelated to stock/futues trading) run into the issue of UBI in their IRA accounts ....but since stock/futures trading is accepted as an IRA investment ...I see ZERO link between how many times a day you buy or sell those investments and the concept of UBI.
Didn't Robert Green used to chime in on these boards from time to time? It would be great to hear what he has to say. I have always had the impression that his tax firm knows what they are talking about. So I would love to know what he is talking about when he warns on his web site that frequent daytrading in an IRA might be seen as a "profit-producing" activity. What is he talking about?! I call it scare-mongering only because I fail to see any link between the frequency of buying/selling and any threat of the IRS disallowing the IRA account tax empt status. Maybe he was referring to a very limited situation - I have no idea. Clarity for the benefit of all, from a "expert" would be a welcome addition to this topic. I heard there was some political BS about him not being a sponsor of this site, and that is why he stopped chiming in. That's just crap. I'm sure everyone here would appreciate his inights.
As an FYI, I have trader status with the IRS, therefore it is a business. I am also trading futures even though I can't participate in the 60/40 tax situation(under trader status) I have two Roth IRA's, wife & myself, and day trade equities. I am using IB and trade an average of 30 trades per week over both accts. Note: IB is also allowing a pseudo margin type acct with IRA's, due to the trade date and settlement date, avoiding the T+3 , plus I am allowed to trade futures with them. I haven't due to a lack of a good futures platform. I am also trading futures for my kids acct (UGMA & UTMA) for college funds and do have seperate 1040's and estimated for them, even though they are minors. I believe the whole matter is grey, as the IRS is probably making up the rules as they go along. Can anyone shed any light on this matter.