Taxes: how do you report your day trading profits

Discussion in 'Taxes and Accounting' started by LowRisk, Feb 18, 2006.

  1. LowRisk


    I've been a day trader for over 5 years now and I always reported my K-1 gains on Schedule E. I never set up any retirement account because I was told day traders weren't eligible early on. But having talked to a few other traders at different firms and several accountant friends of mine, I found it rather confusing on wether we can do it or not. I don't hire accountants to do my taxes since I'm still LIABLE for any errors on my tax returns and I don't see any advantage in hiring one since even accountants are giving me different lines.

    Any input will be greatly appreciated.
  2. I know what you're talking about. Similarily, I don't hire health professionals to care for my back since I'm still the one who's well being is at risk for any errors in their diagnosis and I don't see any advantage in hiring these people since even the health pros are giving me different lines.
  3. Ebo


    The only input your are going to get is UP YOUR BUM from Uncle Sam when you get audited!
  4. I do my taxes myself. Then I have a CPA do my Taxes...then I compare them.

    Turbotax is a great program.

    The IRS website has all the publications I need...

    Michael B.

    P.S. The CPA stays more current than I, but I have won a few arguments with her.

    P.P.S. Doing my own taxes actually helps me to understand my Trades...I pay my taxes quarterly and no exactly what I must do in how I budget my trades and money management.
  5. Mark2m


    I am surprised as a 5 year day trader you haven't heard of "trader status" with the IRS.
    I have trader status with an equity and futures acct. (3years) plus various accts as a regular "investor" using Schedule D.
    Trader Status is available, with Schedule C for expenses only, this includes, platform fee, software fee's if applicable, data fee's , charting (realtime) and end of day scanning. Instead of Schedule D, trader's need to use 4797. There are some pitfalls but I don't worry about wash sales, have to do mark to market, and luckily don't have to worry about social security on the C form.
    In the future, I plan to switch to subS, LLC, or LLc + C corp, although with added Social Security, I willl also be able to reduce health insurance, and add SEP or 401K.
    Good luck.
  6. LowRisk


    I guess my original posting was a little off. My questionwas mainly on retirement plans. I've been filing Schedule E because I'm Class B prop trader at a day trading firm and all expenses are deducted before AGI. However, It's not very clear to me whether we are allowed to set up retirement plans such as SEP or Keogh. Accountants I asked were either unsure or said no, even thru an LLC or S corp. A few traders are doing it but they aren't 100% sure either. Any suggestions.
  7. Without all the facts seen in writing, means that the "facts" can change depending on the story as understood at the time. It is true that some active traders can have earned income and a retitrement plan based on those earnings, just as it is true that other active traders can have income from capital assets and have no retirement plan contribution based on them.
  8. Mark2m


    As a trader with "trader status" from the IRS, and having made the election 475(f), there is no opportunity to take advantage of a retirement fund. Nothing is mentioned in the publication, even though that is my sole income (no W2's) or 1099's.
    Although with the umbrella of LLC/S corp/C corp, you have to take some income from your capital gains, and pay appropriate taxes , plus social security. Before, I get all kinds of mail indicating I am totally wrong, I understand that with an LLC you don't have to pay taxes, since you will be taking a distribution instead of a salary.
    The only reason that I am toying with the corporation is due to the necessity of getting future income from my trading, but also the need to cover myself with lower cost health insurance, take all necessary expenses,plus biggest advantage is the clarity in the IRS laws on these pass thru entities. (no more govt.confusion)
    I recommend a book (although expensive + CD) from Traders Accounting "Tax Secrets for Traders" Joe Wishcamper ESQ. Very clear cut, and an excellent beginning primer.
  9. If you plan on have health insurance that is lower cost because it is paid by a corp, then I'd suggest you SHOULD have an employee of the corp, otherwise the insurance company rate schedule wont apply.

    For IRS purposes the corp should generally pay the insurance for the employees, not the owners. So assuming you will be an employee of the corporation for at least the above reasons, you will then have earned income and will then not only have low cost insurance, but you will have a more tax deductible insurance too!

    If you then are qualifying for the employee health insurance deduction, you generally at the same time would qualify for a retirement plan contribution.

    Not said in your post (I think) is - if this is a regular corp and is it doing the active trading. Generally, IMO, only a pass-thru entity should be the actual trader.
  10. trader59


    from what I understand, if you declare your income as capital gains, you cannot create an IRA or pension plan.
    if your firm will allow you to trade as an LLC, however, you can set up a two member LLC (with a spouse) and pay yourself a management fee. That would then be earned income, so you could set up an IRA (401-K, whatever) from that. But you would have to then pay 15.3% Social Security Tax on whatever you declare as the management fee. You might find that it isn't worth the tax deferment. But, otherwise, the IRS does not let us have our cake (no SS tax) and eat it too.
    #10     May 31, 2009