Day Trading and Tax Preparation

[CassA 0]

First off, I'm not exactly asking for specific tax advice. I'm interested in the different ways day traders in the US prepare their taxes. Currently, I'm using the simulator, and there's no way I'll transition to real without some tax preparation solution in place.

 

I like the idea of getting all my trades from my broker and forwarding them to an accountant. But, are there other options that you use and would share?

 

Are there any online day trader friendly accountants that you use and would recommend?

 

As a new trader going into this, what are the gotcha's you encountered? There's bound to be some hidden cost or part of the process I'm not thinking about.

 

I have already researched this somewhat, and I have ideas, but I'd like to hear from veterans in the community. Thanks.

[Lee W 82]

A couple of us in the chat have been discussing the issue of tax (planning/preparation/etc) as it relates to day trading in the U.S. (IRS). I've done quite a bit of research on the topic as I've been preparing my own taxes for the last decade+. 2018 will be the first year as a trader, so I had some studying to do.

 

Before I get into the nuts & bolts, let me make the disclaimer: I'm not a professional. Please do your own research, consult a professional, etc. I'm not giving advice nor am I suggesting any one thing or another. The information below is solely based on what I've found through the IRS site, TurboTax, and other resources.

 

First, the IRS considers you one of two: an investor or a trader. If you're a (Trader Tax Status), the law considers this to be a business. There are no clear and concise numbers as it relates to activity for what constitutes a trader vs an investor. The IRS, publication 429, states this:

- You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;

- Your activity must be substantial; and

- You must carry on the activity with continuity and regularity.

 

Link to IRS Publication 429

 

So once it is established that you're a trader and not an investor, we look to what forms are necessary. Those appear to be:

 

Form 1040, Schedule D (Capital Gains and Losses)

Form 8949 (Sales and Other Dispostions of Capital Assets)...to break down all the transactions)

Form 1040, Schedule C (Profit or Loss From Business (Sole Proprietorship)... since as a trader, the IRS considers your a business, you report your business expenses here.

 

Many of us use or plan to use Interactive Brokers. If you're using TurboTax (online version), IB is not a partner of TurboTax. Therefore, all of the transactions won't directly upload into your filing. I've read that some people use software/service such as Gainskeeper or TradeLog. Gainskeeper is listed as a TurboTax partner. All of this is basically to complete Form 8949. With that said, I did also discover that the IRS grants exceptions to Form 8949. Form 8949 states this:

Note:

You may aggregate all short-term transactions reported on Form(s) 1099-B showing basis was

reported to the IRS and for which no adjustments or codes are required. Enter the totals directly on

Schedule D, line 1a; you aren't required to report these transactions on Form 8949 (see instructions).

 

This is good news. So assuming you get a 1099-B from your broker, it shows the appropriate information, and a copy is sent to the IRS, you can mark the checkboxes on 8949 for Part I, checkbox A, and Part II, checkbox D. Open the form in the link above and you'll see what I'm talking about. It appears you don't have to show all of the trades (hundreds or more) you completed during the year. Thank goodness, because that would be a HUGE pain in the ass. Here is the TurboTax AnswerXchange link I found that first showed me this:

TurboTax AnswerXchange - question re: how to report Scroll to the top.

 

One last important piece of information that I found is in regards to Self Employment tax. Many say that you'll owe SE tax to the IRS since you're in business for yourself (as a sole proprietor) as a trader. That's not the case. You have to have Earned Income in order to pay Self Employment tax. Capital gains is not Earned Income. Form 429 clearly states:

Gains and losses from selling securities from being a trader aren't subject to self-employment tax. When you open the link above for Form 429, the "Traders" heading shows this.

 

Finally, this was a helpful link for me. It contains a lot of information on this very topic. It also mentions the Section 475 Mark-to-Market election.

Trader Tax Status - Green Trader Tax

 

So that's what I've found so far. I was a bit discouraged at first, thinking I would have to use another vendor (e.g.: Gainskeeper, Tradelog, etc) to track the information, but it it appears I won't have to. Of course, there are CPAs that specialize in taxes for traders, so that may be something to consider. I'm not sure on that yet. First, I wanted to educate myself on how it's all done in case I decide to do it all myself.

 

If others have experience with this, please feel free to chime in.

 

Thanks!

[Carlos M. 230]

Great information!!! I Just when live this past week so this is a great information for me to also start doing my research on how to handle my taxes. Excellent post! Thank you for taking the time to put this together for us!

 

Carlos M.

[John Arndt 1]

I've found this link to have useful information:

 

https://www.marketwatch.com/story/more-tax-tips-for-day-traders-2015-02-26

 

 

[Lee W 82]

This is a very helpful link. Thanks for posting it! I recall reading through it a few times while doing research.

[CassA 0]

Thanks for all the information everyone (past and future).

 

Would someone who has been through the whole process and paid taxes for 1 year or more speak to this? If the answer is as general as "accountant", then great. If the answer is a detailed step-by-step, then great.

[Ari S 0]

Would like a Canadian to chime in on how they handle their taxes.

[Lee W 82]

Many of us use or plan to use Interactive Brokers. If you’re using TurboTax (online version), IB is not a partner of TurboTax. Therefore, all of the transactions won’t directly upload into your filing.

 

I very recently discovered some good news regarding the above. Interactive Brokers is now listed as a partner for downloading 1099 info directly into TurboTax online. I’m not yet certain if it will contain all of the transactions for Form 8949 or if it will just be the basic 1099 information.

 

Here is the link that shows TurboTax as a partner. Also, I found TurboTax listed as a Third Party Service in the Account Settings of Interactive Brokers.

 

TurboTax partner list

 

This could make things a lot easier when tax time rolls around.

[mykogan67 0]

The US IRS Wash Sale Rule really got me. IRS is showing a profit while i actually made a loss (started actively trading Nov 1). So i'm looking into Mark to Market (MTM) and Trader Tax Status.

 

It looks like TradeLog help is classification as Trader Tax Status. The $199 subscription includes Form 4797 filing and supporting documents for filing.

 

i signed up for the free trial for Tradelog, It was able to import my IB transactions after fumbling with it for a bit. I had to disable smartphone authentication, and then download one month at a time instead of the entire year (only 2 months for me so it wasn't too bad).

 

Anyone else use Tradelog? If i can write off all my Wash Sale losses, DAS subscription, forum costs, etc., it'll be well worth the $199.

 

Mike

[Lee W 82]

Mike, I’m curious what you mean. How did the wash rule get you? I’m familiar with it and have reported a few wash sales over the years, but it doesn’t seem all that bad. I suppose there are instances where you can’t deduct the loss, but once the position is closed and you’re out of it for 30 days, it seems as though you ultimately can deduct the loss.

 

See here:

Wash Rule explained

 

My understanding with regard to trading expenses is that you can deduct your expenses as long as you are Trader Tax Status. You don’t need to elect MTM for that. The Green Trader Tax site has a wealth of info on all of this. This video also talks about a lot of it. It is over an hour long, but it contains a ton of great info. It is definitely worth a watch & listen.

 

[mykogan67 0]

Hi Lee,

 

It was considered disallowed because it was over December/January. So you can't sell in December, claim the loss last year, then buy it back in January this year.

 

And yes, I agree that i'll be able to deduct it next year as I understand it. I'll just be more careful next year around December/January and hopefully, fewer losses!

 

Thanks for the info and links. I'll check out the Green Trader video.

 

MIke

 

 

 

 

 

[Lee W 82]

Ok gotcha. I had a feeling that was the case since you mentioned you started in November. Good deal.

[Lee W 82]

Lots of info here, too:

 

http://www.tradelogsoftware.com/resources/wash-sales/

[Crewdog 2]

Is there any real reason not to elect for Mark to Market accounting? It seems to have a lot of benefits for what we do. No wash sale rule, gains and losses are treated as ordinary income/loses vs capital. So if you have a loss greater than $3,000, you can deduct that loss from any other income, and possibly amend a previous year's tax return and get a refund. I know Andrew has mentioned that he lost $15,000 learning to trade. It would be a hard blow to lose that but also be taxed.

 

the two big downsides i see are first convincing the IRS youre a trader. But i think we have talked about that before. But also that long term investments should be kept in a different account and separate from our trading accounts. Also, if you have a large unrealized gain at year end in one or more of your open positions, you are forced to close those positions (on paper) using the year end prices which increases your current year taxable gain. This is true whether you are long or short. Normally you do not realize gains until you actually close your positions, so be aware of this at year end if you have elected MTM. But because we are traders and dont hold positions, it should have minimal impact.

 

Just trying to figure this out as the election to MTM is required with your 2017 tax return to be valid for the 2018 year.

 

http://www.tradelogsoftware.com/resources/mark-to-market-form-4797/

[Lee W 82]

I've been researching this, as well. I've searched for disadvantages of electing MTM, but haven't found much. I have read that if you ever wish to revoke the election, you have to get consent from the IRS, which could be difficult. I'm not sure why it would be that way, but that's what I've read.

 

I think the real issue is proving you are Trader Tax Status. I've read countless situations where traders have had a lot of trades throughout the year, but it was deemed they were not trader status. If you don't have any other job, it certainly becomes easier to prove, though. The YouTube video presented by Robert Green of Green Trader Tax discusses this in detail.

 

In the example you mentioned, if someone has $15,000 in losses, the ability to deduct that is only an issue if you don't have the equivalent or more in gains. You can deduct your losses against gains, and then apply a max of $3,000 of losses against ordinary income. So if someone had losses of $15,000 in a year but gains of $20,000, they have a net gain of $5,000.

 

I'm interested if you find anything more about MTM. I'll continue to research and will share my findings, too.