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Trading Reference Links
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My understanding (which could be wrong)
There's 3 types of trading people:
investors claim capital gains and losses (60/40 LT/ST if futures), but take
expenses as an itemized deduction which has some limits (a floor and also
maybe can't be larger than you gains??).
"traders" are those who are not on an exchange but whose level of trading
rises to that of a (major) business, but it seems to have some other more
subjective elements including frequency/duration of trades, etc. Traders
take the same capital gain/loss but put expenses on sched C rather than as
an itemized sched A ded. THus (proper) expenses are not limited.
Both investors and traders can only deduct $3000 of capital losses against
ordinary income. The rest is rolled forward (or I think with a revised
filing, backwards).
market makers have ordinary income (I think) - if they had another job as
well as local on the exchange (or whatever) they could deduct all losses
against their salary income (no $3K limit). dunno how expenses are treated.
I believe of the 3 types discussed so far, only mkt maker pays SE tax on
their profits. They must be forced to file this way or else why would they?
A "trader" can "elect section 475" and treat income like a mkt maker. But
you lose cap gains rates. However if you had a big loss, you could deduct
it vs ordinary income (no 3K cap). BUT you have to elect to do this
apparently in Apr of hte current tax year. So what good is this, unless you
have a big hit that you don't expect to recover by the end of the year.
To the extent I understand it, traders get a better deal on treatment of
expenses than investors. Income is treated the same. Mkt makers get a
worse deal at least on income. Finally a trader would elect 475 only if
they had a large loss prior to Apr and didn't expect to recover it.
Free advice about taxes from a non tax expert may be worth less than you pay
for it! :)
Conrad Bowers
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