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Re: Trader tax laws...what are they?



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Anyone know the "Principle Business Code" for Schedule C for Trader Status?

Thanks,
Barry

At 10:36 AM 3/18/98 +0000, Dave wrote:
>At 07:32 AM 3/18/98 -0800, you wrote:
>>Hi,
>>I took an early out on my job and stuck the pay off in an IRA. I now stare
>>at bar charts on my computer all day long. Trading is my only source of
>>income.
>>I need to get some tax books regarding tax laws for traders. Does anyone
>have 
>>any good book recommendations? My new job status would be reported next year
>>for 1998 taxes. What proof does the IRS need to be qualified as a pro trader?
>>Thanks!
>>Don Becker
>>dbecker@xxxxxxxxxxxx
>>
>
>By coincidence, a trading buddy of mine sent me this the other day.... it
>may point you
>in the right direction.
>
>Am posting this to the list at large, since this may be of interest to
>everyone.
>
>
>Dave
>
>
>
>
>TSC Tax Forum: Tax Forum Debuts with Special Feature for Day Traders
>
>By Tracy Byrnes
>Staff Reporter
>3/14/98 12:15 AM ET
>
>
>Holy tax questions! The tax forum's email bag is stuffed! Close to half of
>all responses we got were questions related to day trading. We're combining
>those into one big primer this week. Hopefully, we covered your question in
>the process. Gotta do the boilerplate: This is a general primer, we can't
>know or anticipate specifics that might apply to you. 
>
>We've included a few miscellaneous tax questions this week as well. 
>
>Next week we'll conquer the mighty Roth IRA and finish up with your other
>questions. By then we'll certainly need more, so send them, along with your
>full name, to taxforum@xxxxxxxxxxxxxx 
>
>* * * * * 
>
>So What Am I?
>
>As far as the IRS is concerned, there's a big difference between a trader,
>an investor and a dealer. Although we discussed this in last week's Options
>Forum, here's a quick review. A trader looks at the short horizon only. He
>wants to make quick profit today and makes a ton of trades trying to
>accomplish that. 
>
>How many trades? Ken Strauss, vice president of Morris, Brown, Argiz, says
>that a good rule of thumb is 200 per year. So if you do spend your day
>trading, make around 200 trades per year and have no other full-time job,
>you just may qualify. 
>
>A dealer "engages in transactions with customers" says Richard Shapiro, an
>Ernst & Young securities tax partner, and therefore must be licensed. We
>will not be discussing their tax implications. 
>
>Everyone else is an investor. 
>
>
>
>Look, Ma! I'm a Trader!
>
>Bruce Sunderland, Joel Fox and Paul Snyder all asked: What are the benefits
>of qualifying for trader status? 
>
>Aside from the perk of working in your pajamas all day, this is your
>full-time job. It is your business. So you can fill out Schedule C --
>Profit or Loss From Business, the way that the person who runs his own
>carpet-cleaning business does. Everything from income to expenses goes on
>Schedule C. The upshot is there's no limit to the losses you can take. 
>
>That's the good part. The bad part is that gains are taxed at your ordinary
>tax rate, which could be up to 39.6% on the federal level. It may not be
>such a big deal though because most, if not all, of your trades were
>probably short term, so you wouldn't get the lower capital gains tax rate
>anyway. 
>
>As a Trader What Can I Write Off?
>
>Tim Karinen, Kim Hoang, and many others were dying to know. 
>
>"Everything that is necessary to help you perform your job," says Strauss.
>That includes your computer, furniture, publications, online trading
>services, even your TSC subscription if you use it to help you trade
>(pardon the plug!). 
>
>Section 179 of the IRS Code says that a small business can write off up to
>$18,000, so start tallying. This figure will increase to $18,500 for 1998. 
>
>Note that if you fill out Schedule C, you qualify for the Keogh plan, which
>is the self-employed version of the 401(k). And, in response to Ron Watts'
>question, you're definitely free to contribute to an IRA. It's only when
>you're already in a company-sponsored pension or 401(k) plan that
>limitations may apply. 
>
>
>
>I'm Just a Plain Vanilla Investor
>
>Now if you're an investor, you have to fill out Schedule D -- Capital Gains
>and Losses. Here, your losses are limited to the extent of your gains plus
>$3,000 against your ordinary income. Be sure to check the new 1997 rate
>schedule as you figure this out. 
>
>All related investment expenses (again, that's TSC) will be taken as
>deductions on Schedule A -- Itemized Deductions. The bummer is that they
>might be limited, depending on your total adjusted gross income. So you may
>not get full dollar-for-dollar benefit. 
>
>
>
>But What About the Schedule D?
>
>If you're an investor who has made tons of trades in 1997, how do you fill
>out Schedule D? There's surely not enough room to write every trade you
>made on the form. 
>
>Strauss says to just attach your brokerage statements to your tax return.
>Write "See attached" on lines 1 and 9 of the form. You still must show the
>net short-term and net long-term amounts on lines 7 and 16, but you don't
>have to rewrite everything, as long as you include the statements. 
>
>
>
>This Part Is for Both of You!
>
>Now this part applies to both investors and traders. So you decided to sell
>the most expensive shares first because you were being cautious of capital
>gains. Good move. But how do you prove to the IRS which shares you decided
>to sell? 
>
>Well, to start, you do not have to identify on your return that you own
>more than one lot of specific shares. All you need to show on Schedule D is
>the date purchased and the date sold. You can decide what date of shares to
>sell. Just make sure you mark in your records that they're gone. You can't
>sell them twice! 
>
>Dan Thomasson brings up a good point. What about if you're audited by the
>IRS? Golden rule of accountants: Keep everything! If you are audited, you
>can verify your trades with your brokerage statements. You should also have
>the trade slips of the equities you sold. If by chance you do not have
>these (shame on you!), call your broker and give him the approximate date
>when you bought and sold the security, and he may be able to go back and
>find it. But get your records in order now -- just in case Uncle Sam comes
>knockin' someday. 
>
>By the way, Michael Mathews pointed out that options are not reported on a
>1099 form. Why? We're not sure, nor do we want to try to understand the
>IRS' thought process. But trust me, they will find you. So make sure you
>report options on your tax return. There is definitely a paper trail. If
>your broker was ever audited, the government would be able to trace the
>sales to you, no problem. 
>
>
>
>Time for the Wash Sale Rule. Ugh!
>
>In a nutshell: Your gains on trades are always taxed, but you may not
>always be allowed to deduct your losses for tax purposes. Nice guy, that
>Uncle Sam. 
>
>The idea of the wash sale is that the government doesn't want you to keep
>same position and still be able to claim a loss. They prohibit the loss
>unless it has truly sustained. So if you buy 100 shares then sell the 100
>shares at a loss, you can't buy those 100 shares back. If you did, you'd be
>in the exact place you started (with 100 shares), but you'd also have a
>nice loss to put on your tax return. See? 
>
>Here is the official IRS jargon: "The wash sale rule will result in the
>disallowance of a loss if substantially identical stock or securities are
>acquired (or a contract to acquire is entered into) within 30 days before
>or after the sale of the stock or securities at a loss. When the wash sale
>is applicable, the loss is disallowed, and the basis of the new property is
>deemed to be increased by the disallowed loss." 
>
>First, many of you asked for a better definition of a "substantially
>Identical" security. Try this: 
>
>"Anything that ultimately ends you up in the same place is substantially
>identical," says Larry Foster, KPMG partner in the personal financial
>planning group. So if you sell common stock of Microsoft, you can't go out
>and buy MSFT call the next day, because that will result in common stock
>shares. 
>
>Same with convertible preferreds in MSFT. That just gives you that right to
>the common stock again. 
>
>But if you bought a 20-year MSFT bond, that would be okay. The two are not
>related. One's equity, one's fixed income. 
>
>You can buy within the same industry to hedge yourself. If you sell AOL and
>hop into Yahoo! within the 30-day period, that's cool. The wash sale rule
>won't apply. 
>
>Now let's look at a wash sale loss example. Carl Wyman traded AOL
>continually throughout a three-day period. Let's say those days were Jan.
>15 to 17, and that he bought and sold 100 shares and ended up with a $300
>loss at the end of the three days. If he is completely out of the stock
>after the last sale, he can take the loss, no problem. No problem, that is,
>if he stays away from AOL for 30 days. If he goes out and buys more shares
>of AOL right away, he can no longer deduct the loss. 
>
>But does that buy back mean the $300 loss is gone forever? asks Gary
>Sewell. Not totally. Carl's new investment will be adjusted for the
>previous loss. Watch. For simplicity, say he bought 100 new shares of AOL
>at $100 each (don'tcha wish?). That investment, or cost basis, is $10,000.
>But the tax laws say he can tack the previous loss of $300 onto his new
>basis. So his cost basis on those shares now becomes $10,300. The bean
>counters say he got a step-up in basis. 
>
>What makes this step-up in basis a good thing? Well, it's good if he turns
>around and sells the shares for $110 each. The sale price of $11,000
>results in only a $700 gain. Without the $300 jump up in basis, the gain
>would have been $1,000. Gotta like a decrease in taxable gain. 
>
>Let's look at another example. 
>
>Gary buys 100 shares on Sept. 21. On Dec. 21 he buys 50 more. On Dec. 27,
>he picks up 25 more. He now has 175 shares. On Jan. 3, he sells 100 shares
>at a big loss. To see if the wash sale rule applies, you must count 30 days
>forward and back from the time of sale. If we count 30 days back from the
>sale on Jan. 3, we find that he purchased 75 shares within the period. So
>because of the rule, 75 of the 100 shares sold are a wash. They won't
>count. He can't take those 75 shares as a deduction on his tax return. He
>can, however, take a loss on the remaining 25 shares, because they were
>purchased more than 30 days ago. 
>
>If, after 30 days, he decides to buy more of the same shares, he will get a
>step-up in basis from the loss on the 75 old shares -- just like Carl did
>above. 
>
>The are two books that have been recommended by our readers that cover this
>stuff. The first is Taxes and Investing: A Guide for the Individual
>Investor by Richard Shapiro, Esq., and the second is The Trader's Tax
>Survival Guide by Ted Tesser, CPA. Check them out. 
>
>That wash sale loss is a doozy. If you wrote in with specific
>options-related examples, your questions will be addressed next week by our
>resident options guy, Dan Colarusso, in the Options Forum. Be sure to check
>it out. 
>
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