Why would anyone trade under their own ss# for any accounts other than retirement / preferential tax treated accounts? What is so hard about spending $1K and setting up an LLC, corp or even a trust?
It depends how your trading accounts are titled and how you file taxes. As an individual without an exchange seat, gains are taxed at the blended 23% rate. Period. No self-employment tax needed. But you also have no "earned income", so you can not make contributions to retirement plans, or write off other items requiring earned income, such as health related expense. This scenario is completely different if you trade via a business structure with or without an exchange seat. The business facilitates your trading, and you are paid from the business. The business enjoys the benefits of business, including preferential tax treatment of futures trading, employee benefits, writeoffs, etc, and you enjoy the benefits of earned income and company benefits, along with being subject to self employment tax more affectionately known as FICA. Your employment arrangement dictates how the fica (self-employment) tax is handled. For example independent contractor or payrolled. Osorico
Ok, so if i set up an LLC vs. trading unincorporated, uninc. would still come out cheaper right? I am in Texas(no state tax), single status. If i incorporate, I can have all those write offs, but then i would be subject to self employment and Fica. correct? But if i trade under my own name, uninc. even though i wouldnt be able to write things off, the amount spent on taxes would still be lower.?? if that is the case, seems to me being unincorporated is the best choice.
I think its also worth noting that there seems to be a lot of misconceptions floating around regarding the advantages of setting up a corporate entity for the purposes of trading. There is no separate tax code regarding securities and futures transactions for individuals and corporations... its exactly the same in the eyes of the IRS and you do not get any additional benefits as a corporation that you would not get as an individual. As a matter of fact, LLC's and S-Corp's don't even file their own tax return... all profits and losses flow through to the proprietor's personal income tax statement and ultimately are filed on your personal tax return. Unless you have a C-Corp, in the eyes of the IRS you are the corporation. Whether you're trading as an individual or a legal entity you can still deduct all of your operating expenses, and you can still only have $3,000 per year of capital loss carry forwards (this is for futures transactions as per the original post... obviously securities transactions have different tax code). That doesn't mean if you have $6,000 worth of losses one year that you can't eventually deduct all those losses... it simply means that if you are profitable the following year you can only deduct $3,000 against your gains, and you'll have to wait for the year afterward to deduct the remaining $3,000 if you're profitable that year as well. The ONLY benefits you get from creating a legal entity to trade from are (1) asset protection under the law to help shield you from potential liability related lawsuits (i.e. you hit someone while you're out driving around and they try to sue you personally for everything you have), which is a legal advantage not a tax advantage (assuming you setup and maintain your corporation properly so that your corporate veil cannot be pierced), (2) the ability to pay yourself a salary or administration fee if you want to receive some earned income so that you can contribute to a retirement plan so that some of your income can be tax-deferred... but in order to do that you have to pay self-employment taxes on that earned income, and (3) if you want to deduct or get reimbursed from your business for medical related costs via an established medical reimbursement plan... these costs are only deductible against your payroll taxes so if you don't have any earned income and you don't pay self-employment taxes you cannot deduct them. Generally speaking, unless you're going to pay yourself earned income or you have enough money to worry about the asset protection from liability, there really aren't any tax advantages to trading as legal entity vs. trading as an individual.
That is not correct. Regardless as to whether or not you incorporate, you can still deduct all of your trading related operating expenses against your tax liability. Regardless as to whether or not your incorporate, as long as you don't lease or own an exchange membership, you still pay the 60/40 blended tax rate on your futures transactions. The only thing you would not be able to do as an individual would be to pay yourself earned income.
Single status makes your choices black and white. You are PROBABLY correct that trading as individual is the "better" choice, but ultimately it depends on your gains. Business structures can shelter and/or writeoff and/or distribute profits, lowering the overall tax bill of the business and the employee. Osorico
Actually that is not correct, capital loss carry forwards are not limited for the purpose of offseting future gains. If you lost 10k one year and then made 25k the following year, the full 10k can be applied to the 25k thus making your capital gains tax liability 15k. The $3,000 per year is the max you can deduct against ordinary INCOME. so for example if you lost 10K in futures, then got a regular job, you could deduct 3k for the next 3-4 years against that income until the 10k carry forward has been used up
This is totally incorrect. Members of futures exchanges get 60/40 treatment. Section 1256 contracts are reported on tax form 6781 which gives all futures traders 60/40 treatment. The tax issue for members of futures exchanges is that their futures profits are subject to FICA tax. The self-employment tax (FICA) provision in Section 1402(i) does not effect the 60/40 treatment of Section 1256. Every member of a futures exchange knows that they are entitled to 60/40 treatment under section 1256.
Yikes, I can't believe I wrote that... thank you very much for correcting me... my bad. Here's the section from Robert Green's website to support what you are saying:
So let me see if I got this straight, because I am certainly not beyond admitting that I am wrong... are you asserting that exchange members still pay the 60/40 blended rate but are obligated to pay self-employment taxes on ALL of their trading gains (somewhere along the lines of 15.3%) in addition to the 60/40 blended rate of approximately 23%, and that even though they're paying the blended rate its still considered earned income? Perhaps my error was confusing earned income with ordinary income. If so, is it fair to say that the taxes they pay on their trading gains is somewhere in the neighborhood of 38.3% (15.3 + 23) across the board? Thank you in advance for your response.