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Regarding the Trader Status issue, a great deal has been written, some of it
true, some of it close, and some of it not accurate. It is a subject which is
not clearly understood by many tax professionals, many IRS agents, and most
nonprofessionals. Fortunately, there have been hundreds of court cases to
interpret, and the IRS has established a division to assist professionals to
address these issues, and some of the experts there are very good.
I don't profess to be the ultimate authority on all Trader Status issues, but
I have had over 18 years experience dealing with these questions and
considerations, and our firm currently files a great many Traders as such, and
an equal number of nontraders as investors. I would like to try to shed some
light on the subject, although it is far too complex to discuss in its
entirety here.
A trader is someone who trades his own account at such a high level of
activity that it becomes a business to him or her. He doesn't necessarily deal
with customers, but does this activity as a business.
The classification is a subjective one, and it depends on a number of factors,
such as number of trades, what is traded, length of trade, trading objective,
where you trade from, and a whole host of other considerations. It doesn't
have to be a full time job, but it must be a job. You must put the time in
and make the trades.
If you qualify, you are entitled to a whole host of tax perks, which investors
are not.
You can write off most of your expenses dollar for dollar, not as itemized
deductions, but rather above the line where it counts the most.You can take
Section 179 depreciation full amount within limitations in one year. You can
deduct a home office.
Your margin interest, becomes fully deductible. Trading seminars (such as
OMEGA WORLD) become 100% deductible, whereas investment seminars are not at
all deductible to investors (thanks to the 1986 Tax Reform Act). And many
more benefits.
Your income or loss is still considered to be capital gain income (or loss)
and is reportable on Schedule D ($3000 loss limitation per year) in most
cases, and trading income is not subject to SE tax. (if you trade from the
floor, or lease or own a seat, however, it is)
If you want a retirement plan, you better incorporate (Sub S only!) and
generate some earned income, because it is not deductible against capital gain
income.
Now with the 1997 TRA, they threw us a new twist. If you want, you can elect
Section 475 which entitles a trader to mark to market their positions at year
end, consider any income or loss as ordinary and get to write off more than
$3000 loss. However the election is permanent (we have been exploring ways to
retract it after it is made). AND AT THIS TIME (via HR2645 - Technical
Corrections Act to TRA 1997) they do NOT intend to levy Self employment tax on
trading income even if the election is made, unless you fall under the "seat
or floor trader" rules as mentioned above.
This stuff is not simple, and if you have any questions, consult with a good
professional in this area. If you need a question answered, I will try to
help you. If you email me I will try to answer your questions, but please
understand it is our busy season, so I will do the best I can - include your
name, address and phone # so someone can get back to you.
I have put together a great deal of materials for traders, we give some of it
away to help and we sell other products. There is a questionairre I have
designed to evaluate Trader Status of someone. If anyone wants it let me know
- I will email you one for free, and I will even evaluate your chances of
qualifying if you want.
Also there are some recent materials I have just done as promotions for
various brokerage firms on Trader Status and the new law. They are also free.
Alaron has one - call Robin Rosenberg at 1-800-611-6974 I'm sure he will be
glad to send you one (this is a two page summary of the new law for traders).
But the best on I've done recently is put out by the Center for Futures
Education. It is called the Investor's Guide To The Taxation of Commodity
Future's and Future's Options. Keep you eyes out for it. It is 44 pages,
very definitive, and firms will be giving it away soon. One firm in LA ran an
advert in Investors Business Daily for it recently. If you don't find it let
me know.
As I have said for years, "There is really no such thing as an income tax, but
rather an IGNORANCE Tax". The ones who pay the most tax are generally the ones
who are the most ignorant of their rights under current law.
I pay my fair share of taxes, and think everyone should. But, I don't equate
that with being the maximum tax you can pay under current law. As Arthur
Godfrey once said, "I am proud to be an American, paying taxes in the USA.
The only thing is, I could be just as proud for half the money!"
I hope this has been of some help to anyone who's interested.
Ted Tesser, CPA, Author - Trader's Tax Survival guide
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