I have elected two years ago, I have provided all the necessary paperwork and haven't been audited. 1) I filed my statement prior to 4/15/2003 - with my individual income tax return. declaring the first year as 2003. 2) The 3115 -(that can be submitted anytime during the elected year) basically will indicate my change in accounting, and does include the difference (481)a adjustment of the difference between the amount of income reported without the election and amount you report with the election. Yes this can be done after the fact, but is a way to keep you honest on the previous year's gains or losses. Therefore the IRS will know if you are passing over losses to other business or W2income instead of being limited to the 3K loss per year. 3) The Irs had approved my 2003 1040 , and I am presently waiting for 2004 approval since I submit by 8/15. Note: you will find most of what I stated per publication 550. My only question for this thread was the missives based on possible IRS internvention on daytrading of IRA's and the repercussions.
Feeling good that for 2 years the IRS has not audited you, while yes it is a GOOD feeling, doesn't mean that the IRS has formulated any opinion on your tax return, rather it likely means that they haven't selected it for a random audit and further, it means that mathmatically it was probably prepared correctly. It is unlikely from what you said that the IRS "approved" your 2003 return and will some how "approve" your 2004 return. Nor does IRS give "approval" or consent to a form 3115 when you state on it that the Sec 475 election doesn not need their approval (on line # 1 of form 3115). There is no "permission" needed, it is made automatically the moment you drop it in the mail, it can not be denied if properly made. Form 3115 for a Sec 475 M2M election is filed the year FOLLOWING the year of election, and not prior to. It must be filed WITH a timely filed form 1040 for the election year, which generally you can't file until February of the following year at the earliest. If you have a defective M2M election, the IRS would not know until they review your tax return for compliance. If there are any defects, you might consider filing a protective election to make sure you definitely have M2M going foreward.
The thread has meandered somewhat from the original topic, so I'll pose the original question again. Specifically relating to futures trading in an IRA account, the question is this: Some accountants have inferred that the frequency of buying & selling inside the account might cause the IRS to classify the IRA account as a profit-producing entity generating unintended business income. Thereby inferring that the IRS might have the right to tax the gains in the IRA. Seems like weird logic to me, and there is seemingly no case precedent for such logic. I'm not talking mark to market, trader status, or regularly making early withdrawaks from the IRA. All I want to know is how the frequency of futures trading could be connceted to a possible denial of the tax-emempt status of the IRA? Without any rationale by the CPAs who are making these inferences, I fail to understand that there is any problem. I come back to starting point. If futures trading is perfectly legal as an IRA investment, thenwhy would the IRS care how many times a day you buy and sell? Logic says to me that so long as you are not deducting any expenses specifically connected to the futures IRA trading activity, then there cannot be a problem. TraderStatus would you agree?
OrderBlaster: The last thing I would want to rely on in making a tax decision would be my "logic". There is a great deal about taxes that isn't especially logical. My suggestion to you would be to check with a qualified tax advisor and ask your questions to them, rather than decide based on what seems logical to you. I don't know the answer to your question. Frankly, I think it is a gray area...and there are many of these in the tax code. And because of this, it is likely to be resolved by tax court and rulings, based on individual situations and details. Nothing unusual in this by the way, this is the way most gray areas are resolved. I've only heard about the ability to do futures in IRA's in the last couple of years. And therefore, my belief (I could be wrong on this), is that not many people are doing it. I do know that in the real estate area people are flipping real estate within IRA's. And people are worried about the UBTI. I suspect a call to a tax attorney and/or CPA would get you an answer. If you get one I'd love to hear it. OldTrader
I think the reversing of tax exempt status is stupid because you trade once a year or 10 times a day. Why would it make any difference. The one reason the IRS is likely to try this is it's an area where tax revenue can be garnered, AFTER the fact. IRA's were initially designed to be investment vehicles. They have changed character in recent years as some individuals have seen the benefits of trading inside a Roth, me included. If the IRS doesn't like the current use, they better hire a boatload of agents to make sure you aren't violating some unwritten law. Think of the sheer number of Roth IRA's out there. This is no different than the clear as mud trader status. Where do you become an active trader in an IRA or a short term investor? IMHO, it's just another gray area that the IRS can try to hammer you in case they feel like it. Give a damn definitive answer so taxpayers can be aware of any issues they may have and everyone would be much happier and at ease. If the IRS was a public company the executives would be up on charges for not providing adequate and correct information. Yes, I'm a CPA, and think the current tax laws are crazy, stupid, ridiculous, and favor the cronies that wrote them.....
My situation is that I'm eligible to set up a Roth IRA for 2005. It'll probably be the only time in my life that my modified AGI will be less than $150K. So it'll be a one-time $4,000 investment in a Roth IRA. If I go ahead and invest this $4K in normal everyday stuff like mutual funds ...this piddly litttle account isn't going to make a damn bit of difference to my retirement! But then again, I'm a pretty reasonable futures trader so the way I look at it is to say that it's a shot to nothing to gamble with this $4,000. If I lost all of this $4,000 Roth IRA to the futures markets, it is immaterial in my life. I already have normal pension plans elsewhere. Let's say I get 'lucky' with my piddly $4,000 Roth IRA and parlay it into a lot of money over the next several years. Are they going to bust my balls when I try to make a tax-free withdrawal? I mean, what am I supposed to do in advance to stop this potential problem. People say: contact a tax attorney. But this is not a large amount of money. It's just a lousy $4K that I might lose anyway. Given the gray area among accountants, am I really going to spend thousands to obtain a 'private letter ruling' from the IRS in advance of opening this $4,000 account. Hardly! I just want to know if there's anything simple I can do up front to reduce the possibility of grief when I withdraw significant gains from a small investment. The only thing I can think of (given that I'm not paying thousands to get professional advice before opening a $4,000 brokerage account!) is to add the extra step of giving power of attorney to a friend to actually do the trading on the futures account. That way, it was never "me" who personally engaged in the actual buying/selling. I'd be nothing other than the beneficial owner. So when my Roth IRA account runs from $4,000 into millions, trading futures - the IRS would have even less of a case to say I was running a profit producing business in it. Given the recent scare-mongering about this issue, I am thinking that such a step might be prudent when opening the futures account inside the IRA, even though it currently appears uneccessary under tax law.
I have looked into this recently as well.. I was able to get more clarification when looking into real estate investing, etc, via a IRA. In these scenerios, they speak of UBI in terms of you buying a rental property via your IRA, yet you try to collect "mamangement fee's" outside of the IRA for running the rental 's (or try to contract to yourself for maint, etc). Another example was investing in a partnership via your IRA (hedge fund, business deal, etc), where you as an individual earn income from the deal OUTSIDE of the IRA. Basicly, the jist of it from what I could tell was that you can't use IRA funds to invest in an entity that you also happen to derive taxable income from OUTSIDE of the IRA. You can't take your retirement account, start a hedge fund/business/etc, and then take some sort of salary from that business. If you derive any income from the business entity outside of the IRA, then it's a no-no. Example: I can invest my IRA into a fund YOU run, or a business ran by YOU, but YOU can't do the same with your own account..
jason_l, your comment makes sense to me. If IRS would pick on you simply because you trade an IRA account from thousands into millions, I can't imagine the consequence: Day trading equities would also lose tax benefit, trust companies would go out of business, a big class action lawsuit would happen because the owners of huge IRA accounts could afford the best lawyers, how about the little guys with small accounts at IB? ...
Why would someone use a custodial account to trade their IRA when they could use a broker like IB where they can trade anything in one IRA account? I read through those custodian sites but they don't mention what their fees are. This is probably because their fees are too high to mention and when people find out, not many would bother with it.