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It's nice to see the traders on the forum. This post is for you!
I talk a lot about the tax loopholes available for business owners and real estate investors and, to be honest, tend to ignore the stock investors/traders. That's largely because most of my client base are business owners and/or real estate investors. And, frankly, there aren't that many strategies for stock investors.
Here's a few of the things to look at:
- If you pay a management fee on your account, it'll be an "investment expense" which means it's only deductible to the extent of your investment income AND ends up flowing through on your Schedule A...which might be limited due to your income. It's better to have fees that are related to buying and/or selling so that the expense is deductible as part of the basis (if it's related to the buy) or cost of sale (if it's related to the sell).
- If you are an "active trader" you can make an election to turn your investing/trader into a business. That means you can move all of the expenses (computer, home office, education, etc) into a regular business and they'll then be fully deductible and not subject to any limitations or phase-outs. There isn't a hard and fast rule on what it takes to be active, but in general the IRS wants to see 3 things:
(1) Short swings. You are holding a majority of your trades for less than 3 months. Tax Tip: If you have two strategies - both long term and short term, move the long term into a separate business structure so that they are reported differently on your tax return.
(2) Amount of Trades: Generally, you'll need 500+ trades per year to make the grade here. There has been a court case that denied the designation with someone who had 500 trades, but the problem was with (3) below - not the number of trades.
(3) Regular and consistent trading: Once you start your trading business, stay consistent. Having a very busy July and then nothing for the rest of the year isn't going to work here.
If this works, get with your tax advisor to file your election. It's called "mark to market" and can get you some great tax benefits.
If there's interest on the forum, I can post a Part 2 on how you do this election and what recent court cases have said about late elections.
I talk a lot about the tax loopholes available for business owners and real estate investors and, to be honest, tend to ignore the stock investors/traders. That's largely because most of my client base are business owners and/or real estate investors. And, frankly, there aren't that many strategies for stock investors.
Here's a few of the things to look at:
- If you pay a management fee on your account, it'll be an "investment expense" which means it's only deductible to the extent of your investment income AND ends up flowing through on your Schedule A...which might be limited due to your income. It's better to have fees that are related to buying and/or selling so that the expense is deductible as part of the basis (if it's related to the buy) or cost of sale (if it's related to the sell).
- If you are an "active trader" you can make an election to turn your investing/trader into a business. That means you can move all of the expenses (computer, home office, education, etc) into a regular business and they'll then be fully deductible and not subject to any limitations or phase-outs. There isn't a hard and fast rule on what it takes to be active, but in general the IRS wants to see 3 things:
(1) Short swings. You are holding a majority of your trades for less than 3 months. Tax Tip: If you have two strategies - both long term and short term, move the long term into a separate business structure so that they are reported differently on your tax return.
(2) Amount of Trades: Generally, you'll need 500+ trades per year to make the grade here. There has been a court case that denied the designation with someone who had 500 trades, but the problem was with (3) below - not the number of trades.
(3) Regular and consistent trading: Once you start your trading business, stay consistent. Having a very busy July and then nothing for the rest of the year isn't going to work here.
If this works, get with your tax advisor to file your election. It's called "mark to market" and can get you some great tax benefits.
If there's interest on the forum, I can post a Part 2 on how you do this election and what recent court cases have said about late elections.
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