Understanding Tax Implications

Discussion in 'Taxes and Accounting' started by Pondracer, Oct 21, 2005.

  1. Pondracer

    Pondracer Guest

    I live in Chicago and work full time as an internet developer for a local company. I also work independently as a sub for a local development firm (as a developer) and typically I write off my software, computers etc against this income.

    In August I began trading for the first time. I started out small, with a $2500 account. I made some small profits and added to that account to bring it over the $25k limit approximately two weeks ago.

    I trade primarily because I enjoy it. There is a tremendous amount of work involved, particularly as I began at absolute ground zero in terms of knowledge, but it is truly fun. I do not, however, want to turn this into my primary occupation. My goal for 2005 was simply to not lose money and pay for all overhead (ie commissions, data etc). For 2006 I want to accomplish the same, but get a return on my money higher then my ING account.

    I realize these goals will seem modest to most of you, but I feel it will take at least a year or two before I have any real knowledge.

    Daily activity varies, some days I trade nothing and let my positions ride. Or simply get out completely and wait. As an example of a busy day, yesterday I had $8,238 in net trades, a few thousand shares, $102.76 in commissions a net P/L after commissions of $400 and change. Today I am doing very little as I am busy with other things, plus the market is not behaving the way I expected.

    In the last week or so I've become very concerned about the tax implications. I had assumed at worst it would be a net P/L and I would have to treat it as income. I've done some basic research and have a handle on some of the issues, but in particular I am worried about the $3k limit on losses and how that is calculated. Over the last two months I have made several thousand dollars, and I lost a few thousand as well. Is the $3k loss considered a sum of all losses for the year, or a maximum of -$3k P/L for the year?

    Over the last two weeks I have taken days of heavy activity (such as yesterday) and dropped those into an Excel ss to analyze my behavior. I tend to shoot from the hip, and not stick to my stops. While I am profitable overall, I have lost large amounts when I could have done better. A subject for another thread and another day.

    But with regard to taxes, should I do this for every day of the month?

    My wife is a corporate attorney at a firm in Chicago and specializes in private equity, jv's and is now getting into m&a work. If I need to set up some type of business entity in order to position myself better, she would be able to do this and save us some money.

    I would like to end this by saying that these forums have been a great source of information as well as insight into different types of behavior. It certainly has helped me and I am grateful. Some of the posts are hilarious. :D

    Best wishes and good luck to all.
  2. The $3,000 is the net capital loss deductible each year. That's net after netting all capital gains and losses for the year, and net against any capital loss carryforward.

    That is not net against any non-capital losses - such as ISP fees, real time quote fees, and so on. Those fees and expenses are itemized deductions, which are basically reduced to nearly zero tax benefit for many investors.

    Using trader status for tax purposes corrects all the above limitations but, from the description you gave, you might not have enough activity and funds in use to qualify for trader status rather than investor status.

    An entity can sometimes qualify for trader status easier than an individual might, but that may be overkill based on the numbers you listed. Maybe after your learning curve you might revisit the value you'd get out of having a separate entity to trade through.
  3. Consider looking into automated trading using wealthlab, tradestation or something similar (amibroker, tradersstudio, etc). I've been trading since 1999 but never made significant profits until I started automated trading this year in April. Since then I've made more in profits than I've made since 1999 combined. Of course it has taken a ton of work over the last two years.....

    If you can find a way to trade futures you can benefit from the tax advantages of futures (60% of gains are considered long term capital gains) but be very careful with futures -- if you don't know what you're doing you can wipe yourself out very quickly.

  4. Maybe Im not reading that correctly but you can only offset 3k from carryforward losses to your current year profits. If thats what you meant then I agree.