Recently a friend of mine who is full time employed and has a good salary asked me a tax question which I am not sure I gave him the right response so if anyone who has a better response, I would appreciate it. He has a full time 100K job and he is also trading a lot. About10 trade on average per day. He is also getting about 30K to 60K per year from day trading. He asked me wehther he can claim himslef as a trader so he can write off some of the expenses for tax purposes. I told him since his income from trading is less than his regular income, he cannot do it and he might get audited. My response was based on the info that I had from reading "The new trader tax solution" book. Is my answer correct? He might have a home run a year and his profit from trading might surpass his regular income so he cannot predict his income from investment at the start of the year.
Consider setting up a single member LLC. Open the trading account under the name of the entity and a checking account with the same name and EIN. Run all trading expenses through the entity. Very easy to set up. Most states have a set up fee and a yearly fee. You'll have to pay higher data fees at the broker. An LLC is considered institutional, so the account will be considered professional. This way the trading will be a business. Bob
I don't think it has anything to do with how much you make from outside sources in the IRS's view, there is no difference between a professional and an active trader they will ask you to submit some examples of your trading 10 trades a day certainly qualifies data feeds and software can be written off 100% computers and cell phone and cable tv and newspapers and things can only be written off based on the percentage you use for trading
when I started $700 for a computer $50 a month for bloomberg tv $30/mo internet connection $50/mo software and countless books was worth it to me but I wsan't making 100k at a real job
Having an LLC as the trading vehicle would also offer your personal assets some protection. The LLC will own the account. If you blow out past your LLC equity, it would be difficult to go after you personally. I would recommend this structure to any professional trader. Even if you join a prop firm, you can use the LLC as the limited partner.
we use to debate this quite a bit. Seems like you got hit a little harder on the datafeed and SE taxes going the LLC route
Other benefits of the LLC. If you want, you can set up a profit sharing plan. If you join with another trader and have two members, you can save money on health insurance by getting a plan for a group of 2 to 50. Those rates are 1/2 sole prop plans in many states. Sometime you have to look past the few hundred dollars a year the entity will cost. just my opinion.
I will agree with Bob that an entity is the way to go, but there are some problems with single member LLCs. I would also disagree that a single member LLC will protect your assets, most brokers have you sign a personal guarantee, but I am not an expert on that. I would suggest a simple partnership if he is married. One of the deductions of active traders is the home office, but with another job I donât think he can get away with that. Therefore his only deductions will be direct expenses and he has to decide if it is really worth the hassle. The IRS has already won against traders with other jobs, so he is fighting a hostile enemy and an uphill battle. How much does he really have in direct expenses? Even at $2000 per year in expenses and a 30% tax rate that only saves him $600 per year. The simple time and trouble of forming an entity, then having to pay extra every year to have your entity taxes prepared and filed it may simply not make any fiscal sense to bother with it.