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BAC wrote:
>I don't think you can have it both ways. If you file a Schedule C for a
>business, then the profits from that business also go on Schedule C.
>Therefore, you are subject to Self Employment Tax.
WRONG...read on
"A TRADER is an investor who speculates and trades securities on his own
account. He does not hold securities for resale to customers. However,
the trader's stock activity is of the nature that rises to a level of being
a trade or business. If a taxpayer is classifies as a trader, gains or
losses on securities transactions give rise to capital gains or losses
under Section 1221. However, portfolio and investment management expenses
and investment interest expenses become deductible without limitation under
Section 162 in arriving at adjusted gross income. ..." from The Trader's
Tax Survival Guide by Tesser, 2nd Ed., p.223. [substitute securites for
futures, options, etc.]
What does this all mean?
1. The trader status has been established by the various district courts as
well as the Supreme Court as distinct from an investor or dealer.
2. A trader is also defined as primarily engaging in numerous short term
trades throughout the year for their own account and in their own name (as
opposed to investors who trade primarily long term positions). The key
here is FREQUENCY of activity (numerous) and LENGTH of holding period
(short term).
3. All trading business related expenses (Section 162) are reported on the
Schedule C. No self employment taxes need to be reported on Schedule C.
The income is still considered to be capital gain income (or loss), and IS
NOT subject to self-emplyment tax.
4. All trading related income (defined transactions in Section 1221)
reported on the 1099B is entered on Form 6781 (60% long term / 40% short
term split) first and then on Schedule D.
5. All trading related income is still limited to the $3,000 per year loss
requirement (as opposed to dealer who may report all losses in any given
year). Additional losses are then carried forward indefinitely until it is
used up.
6. Since the trading income is not earned income, but capital gain income,
no retirement plan contribution should be made against it.
One should be informed before making any tax related decisions and have a
basic understanding of the tax law. Although I am not an accountant or tax
attorney, I have checked with informed tax authorities and highly qualify
tax attorneys and accountants and they assured me that these strategies are
legitimate. Anyone who says otherwise is misinformed.
Check the tax law for recent decisions regarding trader status. The courts
routinely uphold trader status as valid. However, you must determine if
the trader status designation applies to you. The keys are frequent
trading activity of a short term nature, ie, you must have many more short
term trades than longer term trades. Daytraders would definitely qualify.
Tony Haas
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"...to the last I grapple with thee;
from hell's heart I stab at thee;
for hate's sake I spit my last breath at thee."
-from Melville's Easy Language
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