Day Trading and Tax Preparation

[kcwillis83 3]

Quote

 

Does anyone know, in the U.S., do you end up paying taxes on your net gains for the year or should I be tracking and assuming I pay taxes on each profitable trade I make individually?

[True 17]

What if I have a regular 9-5 type job that I get a W-2 for?  Does that mean I'm out of luck filing a TTS of MTM for the trading part of my income?  I'm just starting to look into all this now so haven't gotten to go through all of the videos/links in this thread (which I will), but hadn't seen anyone mention anything about if there's a W-2 involved in your taxes so figured I'd throw the question out there.  Thanks for any help.

Edited September 13, 2018 by True

[Lee W 82]

4 hours ago, True said:

What if I have a regular 9-5 type job that I get a W-2 for?  Does that mean I'm out of luck filing a TTS of MTM for the trading part of my income?  I'm just starting to look into all this now so haven't gotten to go through all of the videos/links in this thread (which I will), but hadn't seen anyone mention anything about if there's a W-2 involved in your taxes so figured I'd throw the question out there.  Thanks for any help.

I don’t believe it means you’re out of luck, but having a regular job does make it more difficult to be TTS. Keep in mind that TTS and Section 475 MTM are two different things. You can have TTS and not elect MTM. According to Robert Green, TTS simply qualifies you for MTM. 

This link should be helpful to you:

https://greentradertax.com/trader-tax-center/trader-tax-status/how-to-qualify/

[CassA 0]

For what it's worth, I'm working with DayTraderTax.   I took their "TTS qualification" questionnaire and had a phone consultation with a partner.  From what I understand, qualifying for TTS would be discouraged if you work a 9-5 job.   Otherwise, I would want to be TTS with MTM (with my 9-5 job).   I'd follow the advice of whatever tax professional you retain unless you are doing this all on your own.

[John 10]

I was just told that in Canada you cannot set up day trading as a business, since you are not providing a service to anyone else.  Anyone else come across this? From what I read here, in the states it is a business.  Thx

[trader_JK 10]

Hi Folks,

Greentradertax is offering webinar in November if any body interested. Here is the link to sign up

.https://register.gotowebinar.com/register/391948801695224066?source=eml

 

 

 

 

 

[trader_JK 10]

On 5/13/2018 at 12:12 AM, Josh Patterson said:

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.

Hi Josh,

Thanks for the info. Would you mind sending your CPA info to my email [email protected]. I am interested in his service or you can give my email to him. Thanks.

[Daniel Thomas 22]

On 3/5/2018 at 12:49 AM, Lee W said:

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.

Hey everybody...  Just wanted to chime in; since we're encroaching upon tax season...  

According to my CPA, there are actual advantages to using MTM..  I'll try to summarize below with examples:  

Let's say you lose $99k trading....  

If you DID NOT elect MTM, then you can ONLY write off $3k/year until that $99k is recouped.  If you make zero money trading year after year after year --- then you're looking at about 33 years to break even on this "write-off."  On the flip side --- if you DID/DO make enough money -- in any given year -- to offset your losses from a previous year -- then that "gain" can be written-off based on your previous years' loss...  

 

Here are a couple of examples: 

 

Example 1:  You DID NOT elect MTM, and in 2018 you lost $99k trading...  If you throw in the towel on trading, you can write off $3k/year for 33 years....  That would suck....lol... one year of losses; 33 years of write offs.... 

---That said....  If  you happened to sell a house, or realize some other "capital gain," before the entire amount is written off --- then you can deduct THAT  amount from the $99k you lost in 2018...  For example:  You lost $99k in 2018 trading..., but in 2019 you sold a house and GAINED $50k...  Well...  You can write-off $3k in losses from 2019, and offset $50k from  your capital gains in 2019..., which leaves you with a remaining "write-off" balance of $46k for 2020......... ($99-$50-$3 = $46).  

 

Example 2:  You DID ELECT MTM, and in 2018 you lost $99k trading...  If you elected in time, you can actually write off the ENTIRE $99K (as opposed to only $3k/year)...  So, for example, your "other job" brought in $100k in 2018, and you lost $99k trading --- your tax liability would only be based on the $1k net profit you realized on the year... 

 

The examples above are clear as day...  If you lose money day-trading.....AND...you elected MTM in time (per IRS guidelines) -- then you're set!  If you lost last year, however, and made money this year....then you may want to consider ignoring you "MTM election," and taking the capital LOSS instead... 

 

Hope that helps ....  And, for liability reasons --- it's all per my CPA...

 

STAY GREEN people!!  

Daniel Thomas

[Lee W 82]

On 12/12/2018 at 7:48 PM, Daniel Thomas said:

Hey everybody...  Just wanted to chime in; since we're encroaching upon tax season...  

According to my CPA, there are actual advantages to using MTM..  I'll try to summarize below with examples:  

Let's say you lose $99k trading....  

If you DID NOT elect MTM, then you can ONLY write off $3k/year until that $99k is recouped.  If you make zero money trading year after year after year --- then you're looking at about 33 years to break even on this "write-off."  On the flip side --- if you DID/DO make enough money -- in any given year -- to offset your losses from a previous year -- then that "gain" can be written-off based on your previous years' loss...  

 

Here are a couple of examples: 

 

Example 1:  You DID NOT elect MTM, and in 2018 you lost $99k trading...  If you throw in the towel on trading, you can write off $3k/year for 33 years....  That would suck....lol... one year of losses; 33 years of write offs.... 

---That said....  If  you happened to sell a house, or realize some other "capital gain," before the entire amount is written off --- then you can deduct THAT  amount from the $99k you lost in 2018...  For example:  You lost $99k in 2018 trading..., but in 2019 you sold a house and GAINED $50k...  Well...  You can write-off $3k in losses from 2019, and offset $50k from  your capital gains in 2019..., which leaves you with a remaining "write-off" balance of $46k for 2020......... ($99-$50-$3 = $46).  

 

Example 2:  You DID ELECT MTM, and in 2018 you lost $99k trading...  If you elected in time, you can actually write off the ENTIRE $99K (as opposed to only $3k/year)...  So, for example, your "other job" brought in $100k in 2018, and you lost $99k trading --- your tax liability would only be based on the $1k net profit you realized on the year... 

 

The examples above are clear as day...  If you lose money day-trading.....AND...you elected MTM in time (per IRS guidelines) -- then you're set!  If you lost last year, however, and made money this year....then you may want to consider ignoring you "MTM election," and taking the capital LOSS instead... 

 

Hope that helps ....  And, for liability reasons --- it's all per my CPA...

 

STAY GREEN people!!  

Daniel Thomas

This is correct, @Daniel Thomas , however it is important to note that the 3k per year write-off is the max write-off against OTHER income.  If you have capital gains, you can use as much of a capital loss as you have gains, THEN you apply the additional 3k against other income.

Your examples are correct.  I just wanted to clarify the point about the 3k capital loss.  it is mentioned in your post, but I just wanted to help make that point clear.

If you have no other income to report (for example, if you don't hold a regular job), then MTM doesn't have much of an advantage.  You may have a trading loss, but without any other ordinary income, you can't deduct the loss from anything.

I suppose one advantage of MTM is being able to avoid the wash sale rule, but that's not really a big deal if you know what you traded in December, break the chain, and don't trade those same tickers in January.

Edited December 17, 2018 by Lee W

[toan0820 2]

Could someone please show me how to get tax form from IB?  Been trying and havent been able to do it. Thanks in advance.

[BrianS 5]

Toan, log in to the Client Portal website, go to home, then hit the drop down for reports and select "Tax."  As of this writing, Feb 4, the form was not yet available.

 

[wklodge 2]

Don't forget Wash Sales. You get to exclude them under TTS and MTM, but you have to (usually) fill out a form for your broker not to include them in the year-end 1099 to the IRS; otherwise, it causes a tax accounting nightmare.

I also understand that the IRS now allows you to revoke the MTM election, but don't know where I read that.

[phinez 0]

Hi everyone, wanted to revisit tax topic as a PDT for someone who holds a 9-5 job.

 

1. I probably had missed the filing deadline on TTS/MTM for 2020 tax year (many sources i read says I need to elect this when I filed for 2019 tax year - a few months back) - please correct me if im mistaken/ that has changed? I didn't get into PDT until after filing tax

2. Can i still elect TTS/MTM for 2021 if I hold a 9-5 day job? what kind of challenges should I anticipate? I am sure there are PDT here who still hold a full time job? 

 

Appreciate all for your help. 

[wklodge 2]

2 hours ago, Josephine Lau said:

Hi everyone, wanted to revisit tax topic as a PDT for someone who holds a 9-5 job.

 

1. I probably had missed the filing deadline on TTS/MTM for 2020 tax year (many sources i read says I need to elect this when I filed for 2019 tax year - a few months back) - please correct me if im mistaken/ that has changed? I didn't get into PDT until after filing tax

2. Can i still elect TTS/MTM for 2021 if I hold a 9-5 day job? what kind of challenges should I anticipate? I am sure there are PDT here who still hold a full time job? 

 

Appreciate all for your help. 

Hi Josephine,

I'll try to answer your questions based on my experience as a full-time equities trader and someone who had GreenTraderTax do my tax returns for the last two years.

1. It depends. If you plan on trading as a sole proprietor, then, yes, you missed the filing deadline, which was when you filed your 2019 tax return (including extensions, if any). However, you could form an entity and file the TTS election statement within 75 days of forming the entity. In this case, I would recommend that you consult with Green Trader Tax on how to set up the entity. I currently file as a sole proprietor.

2. Again, it depends. If you plan on trading stocks, it will be very difficult to qualify for TTS with a 9-5 day job. If, on the other hand, you plan on trading futures, options, or forex, then you could possibly qualify for TTS if you satisfy what GreenTraderTax referred to as their "Golden Rules."

Specifically, the Rules focus on volume, frequency, holding period, hours, sporadic lapses in trading, intention, overall operations, and account size. The most important requirements are volume, frequency, and holding period.

Volume: 720 trades per year, or 60 trades per month. Each buy and sell is considered a trade, so a roundtrip buy/sell trade would be considered as 2 trades..

Frequency: Trade close to 4 days per week, for a 75% frequency rate. A reasonable amount of time for vacation, sick time, and holidays is permitted. These would not count toward "available" days to trade.

Holding Period: The "average" holding period must be 31 days or less.

Hours: Spends more than 4 hours per day, almost every day, working on the trading business. Their Trader Tax Guide says that most active business traders spend more than 40 hours per week, while part-time traders spend more than 4 hours per day.

Sporadic Lapses: You need to have few or no sporadic lapses during the trading year. For example, you couldn't take several months off during the year and still qualify for TTS.

Intention: You must have the intention to run a business and make "a" living. Your trading business does not have to be the exclusive or primary means of making a living.

Operations: The IRS wants to see a "serious trading business operation." This means possibly having multiple monitors, computers, mobile devices, cloud services, high speed broadband wireless, trading services, and education expenses.

Account Size: Pattern Day Trader (PDT) status requires a $25,000 account. If you're trading futures or forex, $15,000 should be sufficient.

Now you can see why I said "it depends" above. If you intend on trading stocks, you would have to meet the above requirements during pre-market and after-market hours (unless your employer allows you to trade during regular market hours).

For more detail, I would recommend buying Green Trader Tax's Trader Guide on their website. It has much more than I've discussed here, especially about entities.

Good luck!

 

[phinez 0]

14 hours ago, wklodge said:

Hi Josephine,

I'll try to answer your questions based on my experience as a full-time equities trader and someone who had GreenTraderTax do my tax returns for the last two years.

1. It depends. If you plan on trading as a sole proprietor, then, yes, you missed the filing deadline, which was when you filed your 2019 tax return (including extensions, if any). However, you could form an entity and file the TTS election statement within 75 days of forming the entity. In this case, I would recommend that you consult with Green Trader Tax on how to set up the entity. I currently file as a sole proprietor.

2. Again, it depends. If you plan on trading stocks, it will be very difficult to qualify for TTS with a 9-5 day job. If, on the other hand, you plan on trading futures, options, or forex, then you could possibly qualify for TTS if you satisfy what GreenTraderTax referred to as their "Golden Rules."

Specifically, the Rules focus on volume, frequency, holding period, hours, sporadic lapses in trading, intention, overall operations, and account size. The most important requirements are volume, frequency, and holding period.

Volume: 720 trades per year, or 60 trades per month. Each buy and sell is considered a trade, so a roundtrip buy/sell trade would be considered as 2 trades..

Frequency: Trade close to 4 days per week, for a 75% frequency rate. A reasonable amount of time for vacation, sick time, and holidays is permitted. These would not count toward "available" days to trade.

Holding Period: The "average" holding period must be 31 days or less.

Hours: Spends more than 4 hours per day, almost every day, working on the trading business. Their Trader Tax Guide says that most active business traders spend more than 40 hours per week, while part-time traders spend more than 4 hours per day.

Sporadic Lapses: You need to have few or no sporadic lapses during the trading year. For example, you couldn't take several months off during the year and still qualify for TTS.

Intention: You must have the intention to run a business and make "a" living. Your trading business does not have to be the exclusive or primary means of making a living.

Operations: The IRS wants to see a "serious trading business operation." This means possibly having multiple monitors, computers, mobile devices, cloud services, high speed broadband wireless, trading services, and education expenses.

Account Size: Pattern Day Trader (PDT) status requires a $25,000 account. If you're trading futures or forex, $15,000 should be sufficient.

Now you can see why I said "it depends" above. If you intend on trading stocks, you would have to meet the above requirements during pre-market and after-market hours (unless your employer allows you to trade during regular market hours).

For more detail, I would recommend buying Green Trader Tax's Trader Guide on their website. It has much more than I've discussed here, especially about entities.

Good luck!

 

Thanks much @wklodge for the additional info. Looks like the best option is to seek a consultation with GreenTraderTax now to prep for next tax filing

What is the difference between filing as sole proprietor vs an entity? what are the key benefits/disadvantages of each? 

Just going through the list of golden rules, it looks like I could possibly meet all of them even with a 9-5 job but of course, like many said, its subjective and they can possibly still reject given I have a full time job.  

I am curious for those who hold a full time job and trade for income as well, what is the best tax benefit option out there or if not, what should we anticipate - ie. is it capital tax gain rate on any trade income?