How are the various parties in an OPM arrangement handled as far as taxes are concerned? Example... One investor with 100 million allows you to trade a futures account with agreed fees of 2 and 20. Let's say the 2% is based on the 100 million, for simplicity. After one year there was a 50% return bringing the account to 150 million. You've made 2 million on the 2% fee and 10 million on th 20% fee for a total of 12 million. Do you get taxed at ordinary income of approx 40% of the 12 million, or does it get treated as futures income of approx 28%? Do you have to take the money out, or can you leave it in the account and not pay taxes until withdrawl? How does the investor get taxed if they 1) Leave the money in 2) Withdrawl profits remaining after fees? What if the account is set up under a CTA or hedge fund type of organization and not just trading a personal account? How is the investor and trader (you) taxed? Thanks for your help and information.
It is treated as "earned income" and taxed accordingly and you will pay taxes whether you take it out of the account or not. If you don't report it be prepared to cell up with Cuban.
If you are trading futures the investor is taxed under section 1256. You would get taxed as though you are clocking in and doing a regular 9 to 5. If you also have funds in the account then that portion of your earnings qualifies for section 1256 treatment.
One last thing....the investor gets to deduct the expenses he is paying you as a passive activity deduction.
The paid manager cannot just leave their fees in a customer's account. Management fees normally accrue daily and must be paid out on a regular basis - monthly or quarterly. Management fees are subject to regular income tax and FICA tax. For the customer taxes are based on the net return. Leaving the money in the account or withdrawing it makes no difference for tax purposes. Taxation for hedge fund managers is a different and more complex story.