Trading as a Business

I would like recommendations for books or websites that are good sources for starting a trading business to take advantages of tax benefits.

Thanks,
Pradeep

There are many pitfalls and intricacies to setting up a trading business. The IRS has set stringent requirements and hurdles for one to pass before being able to claim a trading business on your tax return. I cannot speak to any good books, but there are two companies I know of that have web sites catering to traders. One is Trader's Accounting (www.tradersaccounting.com). The other is Green & Company (www.greencompany.com). Although both seem to be CPA firms, I am a little bit confused because in my state a CPA firm must use a real person's name as part of the firm name, so Trader's Accounting would not be allowed as a CPA firm name. I'm not sure if Trader's Accounting is the main firm name or if it is the name of a subsidiary.

In any case, I have not used the services of either firm and my comments are based solely on their web sites and free information they provide via email and webinars. Although I do not know their respective billing rates, I would tend toward Green and Company. Their web site appears more up to date and has more information on it. Whatever source you choose for assistance in structuring a trading business, please be aware that you, and only you, are responsible for your income tax return. Your tax preparer and adviser have certain responsibilities as specified by the IRS, the AICPA, and relevant state boards of accountancy, but you are ultimately responsible for the return you file. Be very careful, do not take tax positions that are unlikely to be judged legal, and go slowly.

As a financial professional this is my opinion and free advice, for what it's worth.

Thanks for the reply. I am kind of familiar with Trader's Accounting. I think they do seminars I have listened to before. I guess it is not as big an issue to incorporate as I thought earlier. I had thought I heard that you could get a 20% tax instead of ordinary tax if you became a "trader". Also, I was exploring the notion of moving to Puerto Rico since the taxes there are now almost free!

I would encourage you to check our Green and Company. From what I can see, they have more information on recent tax rulings on "trader" status than Trader's Accounting. The IRS seems to be taking a very hard line on trader status to the point where it appears you almost have to be a day trader to qualify. This does not mesh with the Gary Williams' recommended trading frequency. I do not claim to be any kind of expert in tax law and regulation, but I do know that the IRS can be very inflexible in their approach to individuals claiming to operate a business. This approach can quickly mount up in assessments of additional tax, interest and penalties if one is not very careful.

I think your 20% tax rate assumption may be based on long term capital gains tax rates. For short term trading, particularly options, your income is short term capital gains and is taxed at ordinary income rates. One area where you can get some relief is trading futures or options on broad based indexes. The IRS treats these as section 1256 gains which are taxed 60% at long term capital rates and 40% at ordinary income rates.

Another area to watch out for is wash sales. Some of the brokerage statements sent out do not account for wash sales properly. One last area that is really nasty and complicated is the treatment of buying and selling deep ITM calls (for all you printing press folks out there). Suffice it to say that I would consult a trading tax expert on the sale of any printing press stocks due to being called out or selling them.

If you are very successful and generate trading income in excess of the new Obamacare limits, be aware that additional tax rates are imposed on passive income from trading. The only thing that will screw up trading any more is if the idiots in Congress manage to pass a Robin Hood tax that assesses a tax on every trade.

If I remember my notes correctly, in order to prove you have a legit trading business, you have to show at least 200 transactions for the tax year. That doesn't mean 200 trades, but 200 "transactions". Examples of transactions are: depositing funds, transfering funds, buying a position, selling a position, moving funds between your "three legged table", W/O trades, etc. Given that, it's not that difficult to perform at least 200 transactions in a year. Not sure if this is still the threshold, so you'll need to confirm this up front.

Start small. Go to your county clerk and get a DBA...Doing Business as. Get you name of your company set. Get a separate checking account and use a ledger to keep records of profits and losses and expenses.. As you get better talk with an accountant and see which is the best way to set up your company...as an LLC or S corporation.

Keep a record of your profit and losses. I use a 13 column ledger...only because this is what I use in the other 2 businesses S/O and I have. Our trading is under our LLC corp.

S corp is a little more complicated than an LLC but I doubt if you need to worry about someone suing your trading company. Your income is more limited under the S corp. In otherwords you can't take all the profit.

We used an accountant to help us figure out what was the best way to go. He was well worth the money.



Edited 1 time(s). Last edit at 02/04/2014 10:45AM by Darcy2.