Trader status & Self employment tax?

Discussion in 'Taxes and Accounting' started by automated, Jan 8, 2011.

  1. I have another thread going on Trader Vs. nontrader, but i felt that this separate thread may bring out more specific answers and one on "cut my commissions".

    My accountant sent me the following quote from IRS:

    Special rule 1402(i) states: "in determining the net earnings from self-employment of any options dealer or commodities dealer, there shall not be excluded any gain or loss (in the normal course of the taxpayer's activity of dealing in or trading section 1256 contracts) from section 1256 contracts or property related to such contracts. The term 'commodities dealer' means a person who is actively engaged in trading section 1256 contracts and is registered with a domestic board of trade which is designated as a contract market by the Commodities Futures Trading Commission".

    That means if a professional trader who is member of an exchange (which i was considering for saving commissions), whether or not he trades only for his own account and is not really a "dealer", he owes self employment taxes on the profits VS. a professional who is not a member. Paying 15% in self employment tax and membership + seat expenses would really neutralize any commission savings.

    Can the "Professional traders" in this forum please comment based on their own personal practice/experience. I really appreciate all the input. Thanks.
  2. garachen


    Yeah, that's true. Depending on your trading strategy it can be unlikely that commission savings will offset seat rental + SE taxes. There are ways around this but they are expensive to maintain and kind of a grey area.

    best is to rent a seat and trade in a roth account. Best if you make money that is.