Tax ramifications - securities vs. futures trading

Discussion in 'Taxes and Accounting' started by CarlErikson, Nov 23, 2002.

  1. My trading experience consists of trading securities and options on securities. I have never traded futures, but have become interested in the e-mini ES and/or NQ trading.

    I have a question about the tax ramifications of switching to futures trading.

    Currently my occupation is a "securities trader." I.e., I have trader status in terms of the tax law. Therefore, I do not pay any self-employment tax. I have also made the mark-to-market election, but only for securities trading. I am a retail trader and trade my own account.

    Here are a few paragraphs from:

    My question is, I know that if I trade futures, that 60% of my gains (if any) will be considered long-term capital gains and 40% is considered short-term capital gains regardless of the holding period.

    Suppose currently I only trade QQQs and SPYs and make a certain amount of profit. All of these capital gains are considered ordinary gains because of my mark-to-market election. However, I do not pay any self-employment tax.

    If I trade NQ and ES futures, and make a certain amount of profit, 60% of the gains will be considered long-term capital gains and the rest will be short-term capital gains. But according to the above quote, it implies I would have to pay self-employment tax which is an extra 15% tax.

    Suppose I could make the same amount of profit by trading securities or by trading futures. Which option would you choose to be more tax efficient? Or am I not understanding something in the above scenario properly?

  2. I think I have answered my own question after searching around on the web.

    From IRS publication 550:

    I am interpreting this as saying that only dealers (not traders) have to pay self-employment tax. Of course, dealers are able to contribute to retirement plans while traders are not.

    But it is still a little unclear. Couldn't "gains and losses from selling securities" refer to securities traders as opposed to commodities traders?

    If my understanding is correct (and because I am a short-term trader, not a dealer), then in terms of tax efficiency it is clearly better to trade futures contracts (NQ, ES) rather than securities such as QQQ and SPY.

    Please correct me if I am wrong.