I signed up for some trader education, and before I knew it, I was a business owner. The consultant and I talked quite a bit about my plan, start up capital, trading frequency, hold time, etc, and it seemed clear that I should take the plunge. A year later, I'm a little nervous. ...this is truly a small business, starting capital was a very small 5 figure sum, and I'm trading part-time, drawing no salary until I retire... I've read about some "golden rules" such as 700+ trades per year, aiming to profit from short term swings, etc. Are these issues hard stops, or only have to be dealt with during an audit? I don't, nor do I intend to, make 700+ trades per year for at least 3 years down the road. I made ~ 350 trades last year from April - December. What defines "short term"? My average hold time for options is a few weeks, ~ 30-35 days; my stock trades are mostly buy-writes which last a few weeks to a few months. I definitely intend discuss all this with my CPA when we go over the taxes, I'm just wondering if other small business owners might have some direction for me while I wait.
How're you paying for your living expenses while drawing no salary while your capital is a small 5 figure sum ? wrbtrader
Excerpt from GreenTraderTax blog ... Robert Green is a/the leading expert on Trader Taxation. I recommend you purchase his current tax guide. Note well... Very few CPAs are versed on the intricacies and nuances and of a trading business. Highlights are mine, based on your post... Golden Rules We base our golden rules on trader tax court cases and our vast experience with IRS and state controversy for traders. The trader: Trades full time or part time, for a good portion of the day, almost every day the markets are open. Part-time and money-losing traders face more IRS scrutiny, and individuals face more scrutiny than entity traders. Hours: Spends more than four hours per day, almost every market day working on his trading business. All-time in the trading activity counts, including execution of trade orders, research, administration, accounting, education, travel, meetings, and more. Few sporadic lapses: Has infrequent lapses in the trading business during the year. Traders can take vacations, sick time, and personal time off just like everyone else. Frequency: Executes trades on close to four days per week, every week. Recent tax-court cases show that to help prevent IRS challenge of a TTS claim; it is wise to trade close to four days per week or 75% of available trading days — even if this requires the taxpayer to make smaller trades with reduced risk on otherwise non-trading days. Volume: Makes 720 total trades per year (Poppe court) on an annualized basis. The buy and sell count as two total trades. The court mentioned Poppe having 60 trades per month. During the year, it’s crucial to consider the volume of trades daily. We recommend 720 trades per year — about four trades per day, four days per week, 16 trades per week, and 60 trades a month. The markets are open approximately 250 days, and with personal days and holidays, you might be able to trade on 240 days. A 75% frequency equals 180 days per year, so 720 total trades divided by 180 trading days equals four trades per day. Holding period: Makes mostly day trades or swing trades. The IRS stated that the holding period is the most critical factor, and in the Endicott court, the IRS said average holding period must be 31 days or less. That’s a bright-line test. Intention: Has the intention to run a business and make a living. Traders must have the intention to run a separate trading business — trading his or her own money — but it doesn’t have to be one’s exclusive or primary means of making a living. The key word is “a” living, which means it can be a supplemental living. Operations: Has significant business equipment, education, business services, and a home office. Most business traders have multiple monitors, computers, mobile devices, cloud services, trading services, and subscriptions, education expenses, high-speed broadband, wireless, and a home office. Account size: Has a material account size. Securities traders need to have $25,000 on deposit with a U.S.-based broker to achieve “pattern day trader” (PDT) status. We like to see more than $15,000 for trading other financial instruments. What doesn’t qualify? Don’t count these three types of trading activity for TTS qualification: Automated trading without much involvement by the trader (but a trader creating his or her program qualifies); engaging a professional outside investment manager; and trading in retirement funds. Do not include these trades in the golden rule calculations. 1. Automated trading. An entirely canned automated trading service — sometimes referred to as an “expert adviser” program in the forex area — with little to no involvement by the trader doesn’t help TTS; in fact, it can undermine it. The IRS may view this type of automated trading service the same as a trader who uses a broker to make most buy and sell decisions and executions. On the other hand, if the trader can show he’s very involved with the automated trading program or service — perhaps by writing the code or algorithms, setting the entry and exit signals, and turning over only execution to the program — the IRS may not count the automated trading activity against the trader. Some traders use a “trade copying” service and copy close to 100% of the trades. Trade copying can be similar to using a canned automated service or outside adviser, where the copycat trader does not qualify for TTS on those trades. 2. Engaging a money manager. Hiring a registered investment adviser (RIA) or commodity trading adviser (CTA) — whether they are duly registered or exempt from registration — to trade one’s account doesn’t count toward TTS qualification. 3. Trading retirement funds. Achieve TTS through trading taxable accounts. Trading activity in non-taxable retirement accounts doesn’t count for purposes of TTS qualification. Link to GreenTraderTax... https://greentradertax.com Link to above referenced blog post... https://greentradertax.com/how-to-qualify-for-trader-tax-status-for-huge-savings/ Lint to Greens Trader Tax Guide... https://greentradertax.com/shop-guides/greens-trader-tax-guide/ HTH
Most CPAs I've met with haven't a clue about trading as a business. You need to get with someone who has experience in this area. IMO, you were ill-advised by your consultant, and you need reliable advice before you go filing as a trading business.
My guess is that ccrjr1 has another source of income that's his primary source of income and its currently supporting him (paying for his living expenses)...allowing him to not need to draw a salary from his business on such a small 5 figure trading capital as a part-time trader. Another possibility, someone else is supporting him or he's already retired and financially set. wrbtrader
At least get yourself a copy of the Green Trader Guide. It will answer most of your questions and is only $53 to download. https://greentradertax.com/shop-guides/greens-trader-tax-guide/
You are better off position trading and trying to hold onto your stocks for 1 year atleast. The first $38,600 of your profits are tax free. I intend to adopt that practice to a small account I have which is a regular account. IRAs you can trade options and swing trade. No tax consequences and you can grow your nest egg assuming you know how to trade the stockmarket.
Thanks for your responses. The tax firm I hired specializes in dual entity businesses, and is experienced with trading businesses. I meet a lot, but not all of the golden rules; notably, volume. I wonder how this will affect me overall, given the flow through structure. Headed to Green Trader's site now. ...I have the intention that this business provide at least supplemental income 3 years from now, til then I had planned to forego a salary for reinvesting all proceeds back into the business so that it will be large enough to provide at least a supplemental income...intention, right?
@ccrjr1 You have mentioned ABSOLUTELY NOTHING that suggests a dual-entity structure for your trading business would be appropriate or advantageous taxwise. So given that, for your sake, and your pocketbook, I hope there are substantial untold aspects to the facts and circumstances. And FYI... the golden rules are not either or. You meet the qualifications FOR THE TAX YEAR BEING FILED or you don't. TTS, Trader Tax Status is year-by-year qualification, not a permanent designation. Intention for supplemental income 3 years from now means you are merely an investor/hobbyist until then. Good luck
Most will not qualify for trader tax status. I read you have to have 760 trades. My trades are around 250-300 in my IRA. Also, you have to show you are making monies and they are talking millions. How many retail traders will reach that threshold? I do not think too many. However, they are niches small retail traders can exploit. That is the longer term capital gains. The first $38,600 is tax free. Then, use IRAs to grow your nest egg until you reach age 70 when you have to make required minimum distributions. No going around that now. Uncle Sam will collect his taxes at some point! For those receiving Social Security in the US, if single, keep your income below $25,000 or for couples below $34,000. None of your Social Security benefits would be taxable if you do that!