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For Barry Robbins: the "Principal Business Code" for a trader is 8888
which, I believe, is a catchall "other" code.
For BelAirCap: The key to the question of self-employment tax, as it is
for participation in retirement plans and deduction as a BUSINESS
expense of medical insurance premiums, is what the tax code calls
"earned income" - all these items depend upon the existence of "earned
income" and capital gains are expressly defined NOT to be earned income.
I would again refer all interested traders to Ted Tesser's book for
answers to questions in this area. Keep in mind that this particular
area (tax issues related to securities "trading") is very arcane and
very few even, if any, of the IRS agents you reach by calling their info
number are knowledgeable about the subject.
Let me quote from Tesser's "The Trader's Tax Survival Guide", pg 249:
". . . It is obvious that expenses should be reported on the Schedule
C; however, the question has been raised, Since the income for a trader
still consists of capital transactions, shouldn't it be reported on a
Schedule D?
"The answer is yes. The transactions are basically transactions as
defined in Section 1221 of the Code. In fact, Form 1099B is often
generated showing total year-end gross proceeds from securities
transactions..
"Another question usually asked goes something like this: Since the
income generated is NOT really investment income, but rather is
considered as active business income, shouldn't it be subject to
self-employment tax? In this case, wouldn't it then be reported on
Schedule C, as well as Schedule SE, the form for calculating
self-employment tax?
"The answer is no. The income is still considered to be capital gain
income (or loss), and it is not subject to self-employment tax. . . .
"In addition, because the income is not earned, no retirement plan
contribution should be made against it. If that is your intent, your
trading should be done through a Sub S corporation, which pays you
salary. . ."
"Because the income is of one type (capital) and the expenses are
ordinary, you must use two forms to report it. The income should go
through Schedule D and the expenses through Schedule C."
Carroll Slemaker
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