Day Trading and Tax Preparation

[mykogan67 0]

One thing i saw in researching is that you have to notify the IRS ahead of time that you're changing accounting method to MTM. So it's apparently already too late for 2017 tax year. For 2018 tax year, you'd need to file IRS Form 3115 by April 15th this year.

 

MIke

 

[KerryS 0]

My tax lady was a bit bewildered when I brought in my taxes this year so I'm searching for someone who specializes in self-employment/small business ownership for next year. Also looking into the software to download all transactions. I understand business expenses (scanners/hardware/education) can be deducted as business expenses as well. Going to speak with a family friend who owns his business later this week. But so far, would rather not do it myself except for the broker transactions part. My broker, Schwab, readily recommends MTM in December for anyone interested. Regarding pattern day trader, they said you are flipped to that status if you are placing 5 day trades within a 5 day period (plus must have 25K AT ALL TIMES in the account cuz that will freeze you out from day trading too). Schwab has been very supportive and responsive. I don't mind paying a bit extra in commissions, it's part of the tax cost basis anyways. I will update this post if I find new info re: taxes in U.S. Also if anyone knows or can recommend a really good tax specialist in the U.S. please let me know. I don't mind mailing them.

 

a side note: My neighbor retired from the IRS after 25 years and she says the IRS is way more interested in the people who aren't paying tax in the country than the people who do, and just may not be doing it exactly right. Just FYI, not saying free pass to do taxes wrong.

[Lee W 82]

Green Trader Tax seems to be the most well-known firm in the trading community. I referenced some of Robert Green's material in this thread. Here is the site:

 

https://www.greentradertax.com/

 

You can set up a phone consultation with him to determine your needs.

 

I don't think PDT has anything to do with taxes. Perhaps you're thinking of Trader Tax Status. In order to deduct all of the items (such as scanners, hardware, education, etc) like in a small business, you have to be Trader Tax Status. That is referenced in this thread, as well.

[KerryS 0]

GreenTraderTax is excellent. Thank you!

[Mike F 0]

Is it necessary to export daily reports from DAS for tax purposes and/or record keeping? If so which ones are recommended? I would think it isn't necessary to manually log each trade every day. What does the typical broker provide? Trying to get a handle on most efficient way to log all info for tax purposes. Thanks

[KerryS 0]

Hi traderjoe,

 

My advice is to check with your broker. My broker states that the transactions history can be exported to TurboTax and Quicken software for tax purposes.

[Josh Patterson 2]

I have a CPA handle my taxes. After speaking with him about MTM that is the route I went with. With IB all I had to do was download the tax info they provide onto a thumb drive and hand it to him. Since I am 0% fluent in tax preparation, or should I say, I am 0% interested in doing tax prep, paying a knowledgeable CPA a few hundred bucks to handle it is worth the cost. At first I was nervous that he wouldn't know the difference between "normal" taxes and those of a day trader, but that was short-lived after a simple conversation.

 

For reference's sake I pay between $325-375 USD to my CPA for both my wife and me filing jointly. Seems like a fair value to me; not to mention tax preparation expenses are a write-off. Clearly my two cents worth is hire a professional to handle it. Good luck everyone.

 

Best, Josh P.

[Lee W 82]

MTM certainly has some advantages. My understanding, though, is that you have to file taxes with Trader Tax Status for at least one year before the IRS will allow you to elect MTM for the next year. In other words, TTS makes you MTM eligible.  Perhaps your CPA says otherwise, but the vast amount of info I’ve read from reputable sources (Green Trader Tax, for example) says this.  On the other hand, the IRS doesn’t state anything that says this.  They simply say you file a statement with them that you’re making the election.  So if you’ve made that election by April 15th of this year (2018), you’ll be using it for the 2018 tax year (that you’ll file early 2019).  Is that your understanding, too?

 

I know MTM allows you to report gains and losses as ordinary income, thus being able to use losses against other income without a limit. If your only income is from trading, is there any advantage to MTM?

[Josh Patterson 2]

Lee,

 

I started trading late in '17 and like you say I couldn't claim MTM for that because it wasn't filed in the appropriate time frame. I am under the impression that my 2018 trading will fall under MTM since I signed the MTM Election under code sec. 475(f).

 

For others, if you didn't claim that status in time, it won't be valid for 2018. I'm not sure what the actual cut-off date was. I wish I could speak to the exact reason I decided to go with MTM but I only remember that my CPA laid out the different scenarios and I chose the one that fit my needs based on how I (and I would think we all) trade. It had to do with wash rules and not being able to claim a wash if you trade the same ticker in a 30 day period (I think). Since a stock could be in play more than once a month it seemed MTM was a better route.

 

If that doesn't sound right to anyone please let me know ASAP so I can make double sure.

[Lee W 82]

Josh,

 

I believe you've got it correct with regard to the time frame.  According to the IRS site, April 15th is the cutoff for submitting your election.  So by April 15th 2018 for the 2018 tax year (filing in 2019).

 

The wash sale rule is the main reason, from what I've read, that people choose MTM.  Well, that and the fact that you can deduct unlimited losses against other income.  However, the wash sale rule only really affects day traders in December/January.  The wash sale rule still allows you to deduct your losses, but the accounting is a bit different.  The net  number is the same, however.

 

Here's an example taken from the Dummies site.  I've included the link, as well:

 

http://www.dummies.com/personal-finance/investing/day-trading/understand-the-irs-wash-sale-rule-when-day-trading/

 

On Tuesday, you bought 100 shares of LMNO at $34.60. LMNO announced terrible earnings, and the stock promptly dropped to $29.32, and you sold all 100 shares for a loss of $528. Later in the afternoon, you noticed that the stock had bottomed and looked like it may trend up, so you bought another 100 shares at $28.75 and resold them an hour later at $29.25, closing out your position for the day. 

 

The second trade had a profit of $50. You had a net loss of $478 (the $528 loss plus the $50 profit). Here’s how this works out tax-wise: The IRS disallows the $528 loss and lets you show only a profit of $50. But it lets you add the $528 loss to the basis of your replacement shares, so instead of spending $2,875 (100 shares times $28.75), for tax purposes, you spent $3,403 ($2,875 plus $528), which means that the second trade caused you to lose the $478 that you added back.  On a net basis, you get to record your loss. 

 

So you still get to account for the losses, it's just a little more tedious.  If you have a lot of trades, it can become very tedious. However, software like TradeLog can download all of your transactions from various brokers (including IB) and will do it all for you.  With the software, my understanding is that the preparation is rather simple.   The main thing with the wash sale rule is if you close a position in December, you shouldn't trade that security for another 30 days so as to not screw with everything from one year to the next.  If you trade the same security within the 30 or 31 days (I don’t remember which), the loss is disallowed. That was the main reason they created the rule; people would sell in December for a loss, buy back in January, and write off the loss on their taxes.  The IRS put a stop to that with the wash sale rule.  It's a little bit of a hassle, I guess, to make sure you don't trade the same security(ies) in January that you did 30 days prior, but other than that, it's no big deal.

 

Without MTM, you can deduct all of your capital losses from your capital gains and then deduct up to $3,000 of losses against your income.  As an example, if you had 20k of gains and 24k of losses, you could use 20k of those losses against the gains, then another 3k of the losses against any other income.  You'd have 1k left over that can be carried over to the next year and used against gains/income then.

 

With MTM, there is no 3k cap.  If you have 20k of gains and 24k of losses, it's all reported as ordinary income.  So you'd basically use 20k of losses against the 20k in gains, then use the other 4k of losses against other income.  It's all the same income with MTM.  Salary, capital gains, losses - it all gets lumped together.

 

I'm not sure what the downside of MTM is.  I know that if you decide you don't want to use it at some point, you have to get permission from the IRS to have it revoked.

 

Some good info here:

 

https://greentradertax.com/trader-tax-center/trader-tax-status/section-475-mtm-accounting/

 

and here:

 

https://taxmap.irs.gov/taxmap/pubs/p550-028.htm#TXMP662b7702

 

and here:

 

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

 

All of that is my understanding of sec 475 MTM. I am not a tax professional.  Everyone should do their own research and consult a professional to determine what's best for their own situation.

 

If I’m mistaken on something, please share and let me know.

 

Thanks!

[daniel lindegren 27]

I highly recommend each of you get a paid consultation with Robert Green, as each one of your situations may vary slightly. I learned a lot speaking with him, and it was money well spent.

[Lee W 82]

1 hour ago, Marek L said:

Anyone read the book that Robert Green put out on Trader taxes, is it worth the $60?

I plan on trading full time so am guessing trader status will be beneficial...my understanding is the main change will be that income changes from investment income and is no longer taxed as capital gains but as earnings from self employment, and therefore you get to write off business expenses e.g. home office, costs of trading, PC, subscriptions etc as long as they exceed the standard deduction, as well as deduct health care premiums and contributions to a qualified retirement savings plan from your pretax income. That seems much better than e.g. itemizing healthcare premiums over $7500.

Since 2018 will be my first year as a full time trader I am not sure how to go about the timing as well as filing any required paperwork with the IRS. I might hire a qualified CPA (anyone interacted with GreenTrader Tax?) to get me over the first hump...any recommendations how to go about this?

I will probably use IB as broker since they make tax reporting easier than SpeedTrader. That seems like it could become a sticky point for a full time trader who wants to get trader status with the IRS.

Marek,

Sounds like you’re confusing Trader Tax Status with the MTM election. TTS let’s you write off expenses, but the gains are still taxed as capital gains, not as ordinary income. Therefore, you can only use up to $3,000 of losses against other income. Also, while you’d be considered self-employed, capital gains are not subject to self employment tax  

The MTM election is what makes your gains reportable as ordinary income. Trader Tax Status makes you eligible for the MTM election, but you can certainly be TTS without the MTM election.  

34 minutes ago, onosendi said:

I highly recommend each of you get a paid consultation with Robert Green, as each one of your situations may vary slightly. I learned a lot speaking with him, and it was money well spent.

I agree with what Onosendi said.  Robert Green is a wealth of knowledge and a consultation with him would be well worth the money. Marek, I believe you can get started by going to greentradertax.com and purchasing a consultation slot with him. 

[Lee W 82]

8 hours ago, Marek L said:

Lee,

thanks for the pointers. Sounds like I need to do more home work and maybe a consult with Robert Green would help move things in the right direction. I read somewhere MTM election the first year of day trading does not need to be done in advance so hopefully I can get all this straightened out as I move along to live trading later this year.

To elect MTM, you have to do so when filing the prior year taxes. The last part in this link tells it:

https://greentradertax.com/trader-tax-center/trader-tax-status/section-475-mtm-accounting/

Basically, for tax year 2018 (you’ll file taxes in early 2019), you would’ve had to have made the election with your filing by April 17th, 2018 (when you filed your 2017 taxes).  

Edited July 1, 2018 by Lee W

[Norm 45]

On 7/1/2018 at 6:56 AM, Lee W said:

To elect MTM, you have to do so when filing the prior year taxes. The last part in this link tells it:

https://greentradertax.com/trader-tax-center/trader-tax-status/section-475-mtm-accounting/

Basically, for tax year 2018 (you’ll file taxes in early 2019), you would’ve had to have made the election with your filing by April 17th, 2018 (when you filed your 2017 taxes).  

So, I've learned this is not so. You can, in good faith, elect 475 MTM accounting later in the year if you can show that you didn't know better.

It is essentially a extension that you file with the 475 request that says you're doing it as soon as possible and not because it helps you retroactively.

[Lee W 82]

3 hours ago, Norm said:

So, I've learned this is not so. You can, in good faith, elect 475 MTM accounting later in the year if you can show that you didn't know better.

It is essentially a extension that you file with the 475 request that says you're doing it as soon as possible and not because it helps you retroactively.

This is good news!  Where did you find this info?  

So you COULD file the 475 election now for tax year 2018 (for which you’ll prepare taxes early 2019)?  Normally you would have done so by 4/15 of this year  

I wonder how you know if the IRS accepts your request. Do you just make the election by way of the letter to the IRS and call it a day?