Day Trading and Tax Preparation

[wklodge 2]

14 minutes ago, Josephine Lau said:

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? 

 

The only way to elect TTS for this year is to file as an entity and make the election within 75 days of filing. As to when the TTS would take effect, I'm not entirely sure. You'd have to ask GreenTraderTax about that or buy their Trader Tax Guide. But before doing that, I'd sit down and figure out whether you can meet the Golden Rules first. If you can't, there's no point in electing TTS or even talking to GTT in the first place.

Regarding differences between filing as a sole proprietor or entity, as a sole proprietor I can't contribute to any kind of IRA or tax-deferred account. As an entity, you can if it's set up for that. Similarly for healthcare costs. An entity can pay for these costs but a sole proprietor cannot. A sole proprietor set up is much simpler than one for an entity, but an entity will likely cost you in State fees, some of which as Mr Green mentioned in his presentation, can be substantial. A disadvantage of filing as a sole proprietor is all your expenses go on Schedule C. The IRS sees none of your gains there (b/c the gains are on other forms). It is different for an entity. The IRS can readily see its gains and losses. Of course, whether you post gains or losses is of no concern for qualifying for TTS and deducting business expenses on Schedule C.

I beg to differ about being rejected TTS as being subjective. If you meet the objective Golden Rules, you can certainly qualify. It may be a matter of convincing the IRS that your trading is a supplemental income (if you ever get to the stage of interacting w/ the IRS; I haven't yet). There are other benefits to filing as an entity but you'll have to read about them in the Tax Guide. I'm not concerned about them as a sole proprietor.

Under TTS you would not be able to treat trader gains under capital tax gains rates. Trader income and losses are treated as Ordinary income (i.e., short-term income). You can certainly have a separate account in which you keep your long-term investments, but it has to be segregated from your trading account. Don't mix the two. Day trading transactions and swing trading transactions can, however, be in the same trading account. Just keep your average holding period below 31 days (sometimes difficult to do w/ swing trading). And, don't forget, it's your "average" holding period. Some instruments may be held longer, some less. Just as long as the average is less than 31 days.

I would first figure out whether you can realistically meet the Golden Rules, then buy and read the Tax Guide, come up with questions, then consult with GreenTraderTax. Just have a list of questions so you can best utilize the 45-minute consult session. Don't worry, Mr Green will ask you a lot of questions to try and determine whether you'll qualify for TTS. If he says  you can, then you're good to go.

Hope this extra info helps.

[phinez 0]

Thank you so very much @wklodge

This is really helpful. Will do more research on this. 

[phinez 0]

1 hour ago, BrianS said:

I saw that this thread was resurrected.  I wanted to clarify something I perceive as incorrect, or at least unclear, in the information above.

 

Josephine asked a question regarding the filing deadline on TTS/MTM.  As I understand it, Trader Tax Status (TTS) and Mark to Market accounting (MTM) are not the same thing.  You need to have TTS to elect MTM accounting, but you can have TTS and choose not elect MTM accounting.    Regarding TTS, there is no election made with the IRS.  If you meet the rules set out by the case law (well defined above), you simply start taking proper expenses on your schedule C as a sole prop.  You still report your income as capital gains and are subject to wash sale rules as well as capital loss limitations.  You do not report any income on the schedule C, only the expenses.

 

The MTM code section 475 election is a change in your method of accounting and needs to be elected with the IRS.  This election is due at the same time your non-extended tax return is due, typically April 15 and impacts the following tax year.  Meaning an April 15, 2019 election would have started for your 2020 tax year.  This election allows you to treat you to report your trades on form 4797 and treat them more akin to a purchase and sale of inventory.  The main advantages of the 475 MTM election are that you no longer have wash sale rules on your trades and that you can take losses greater than the capital loss limitation.

 

Hi Brain

Thanks for the clarification - understanding proper tax filing for a new trader is definitely a learning curve (on top of trading itself) !

As someone who holds a 9-5 job, starting out with part time trading, what has been the most common/ tax efficient route taken on filing tax for someone who will meet the golden rule vs someone who does not?

If I do not meet the golden rules, what is then the option? 

 

[wklodge 2]

On 8/17/2020 at 11:58 AM, BrianS said:

I saw that this thread was resurrected.  I wanted to clarify something I perceive as incorrect, or at least unclear, in the information above.

 

Josephine asked a question regarding the filing deadline on TTS/MTM.  As I understand it, Trader Tax Status (TTS) and Mark to Market accounting (MTM) are not the same thing.  You need to have TTS to elect MTM accounting, but you can have TTS and choose not elect MTM accounting.    Regarding TTS, there is no election made with the IRS.  If you meet the rules set out by the case law (well defined above), you simply start taking proper expenses on your schedule C as a sole prop.  You still report your income as capital gains and are subject to wash sale rules as well as capital loss limitations.  You do not report any income on the schedule C, only the expenses.

 

The MTM code section 475 election is a change in your method of accounting and needs to be elected with the IRS.  This election is due at the same time your non-extended tax return is due, typically April 15 and impacts the following tax year.  Meaning an April 15, 2019 election would have started for your 2020 tax year.  This election allows you to treat you to report your trades on form 4797 and treat them more akin to a purchase and sale of inventory.  The main advantages of the 475 MTM election are that you no longer have wash sale rules on your trades and that you can take losses greater than the capital loss limitation.

 

Yes, it's true that TTS and MTM are not the same thing, but you still have to elect TTS via letter to the IRS. The deadline for 2020 was when 2019's return was due in April 2020. If you make a timely filing, you can then elect MTM. Mr Green will give you the wording for the TTS election letter to file w/ your return. You need TTS in order to elect MTM, but it's worth it b/c MTM allows you to avoid those pesky wash sale rules. TTS alone I believe allows you to claim expenses on Schedule C. I would recommend buying his Trader Tax Guide on his website greentradertax.com for more details. You can skip the chapters on Entities if you're filing as a sole proprietor. I file as a sole proprietor and elected TTS and MTM so I don't know much about filing as an entity. But, what I do know is if you miss the TTS election deadline, you can still claim TTS by forming an entity and filing for TTS within 75 days of the forming. Mr Green is probably the better person to consult on all the ins and outs of this. None of your trading income can be reported as capital gains since trading income is considered to be ordinary income.

[phinez 0]

Hi, is there anyone who is with Interactive broker & filing tax on their own? Interactive Broker Tax statements 1099 & 8949 sent to IRS has Wash Sale disallowed even for MTM 475 traders (I have filed MTM 475 & 3115 in prior 2 years). On Turbo Tax Form 4797 for MTM 475 traders, they asked for Gross Sales & Cost Basis. I am not sure where to find this number on IBKR statements that correctly include Wash Sale. Anyone had experience?