Special thanks to TradingPub Guest Contributor, Steve Ribble, on the following guest post on taxes. Even though we pay our fair share of taxes, we are definitely not tax professionals. We always feel it is in a trader's best interest to verify everything with a CPA. We greatly appreciate Steve laying this out for our patrons:
In my last article, I went over HOW to qualify as a trader in securities with the
IRS. I want to follow up that article with the WHY. Why should you want to qualify
and file your tax return as a trader in securities?
The advantage to filing your tax return as a trader in securities vs. filing as an
investor can be summed up in one word: DEDUCTIONS! If you qualify for trader
status, you get to file a business tax return (Schedule C) and claim business
expenses. This enables you to take many more deductions than you’d be able to
take if you filed as an investor. Investors are severely limited under the tax code
from deducting trading expenses.
Let’s look at a comparison side by side:
Looking at the above list you can see that filing your tax return as an investor
limits the amount of expenses you are able to take. Since all expenses for an
investor are filed on a Schedule A, they are classified as miscellaneous itemized
deductions. This means that they must be greater than 2% of your adjusted
gross income. It also means you can deduct only the amount over the 2% limit!
For example, if your AGI is $100,000, your expenses must be greater than
$2,000 in order for you to deduct them. If your expenses are $3000, you can
deduct only $1000 (the amount over the 2% limit) from your taxes.
Traders are not subject to this limitation since they will claim all of their business
expenses on a Schedule C. This enables them to deduct ALL expenses
associated with their trading business dollar for dollar!
LIMITS ON INVESTMENT INTEREST
Investors can deduct margin interest as an itemized deduction on their Schedule
A but only to the extent of their net investment income. Any excess investment
interest expenses are carried over to the following tax year to be deducted in the
Traders are not subject to this limitation. They deduct margin interest in full on
Schedule C as a business expense instead of an itemized deduction. Since
margin interest for most traders can run many thousands of dollars, this is
a HUGE tax advantage.
HOME OFFICE AND EDUCATION EXPENSES
Investors cannot deduct home office expenses or education expenses. This is
another big tax savings for traders. Even if you rent your home or apartment, a
trader can take the home office deduction, opening up thousands of dollars in tax
savings every year!
MARK TO MARKET ACCOUNTING
One of the most beneficial aspects of trader tax status is the ability to claim mark
to market accounting. If you make this election, your trading losses won't be
subject to the $3000 capital loss limitation that investors are stuck with. Instead,
your capital gains/losses are treated as ordinary gains/losses. Ordinary losses
don't have a limit and can be used to offset any income. This is a huge benefit for
a trader who has a bad year.
Hopefully you see all the benefits to being able to file your tax return as a trader
in securities. If you would like to see a list of possible trader expenses that you
can deduct from your taxes, please go to our website at:
In my next article, I’ll explain the benefits of the mark to market accounting
method for your trading business.
Steve Ribble is founder and CEO of Shrink My Taxes LLC and Trader Tax
Coach, a tax and accounting firm catering to the trading community. He is a
leading authority on trader taxation and trading entities. Steve is a highly sought
after public speaker and works with traders from all over the United States,
putting in place proactive strategies to minimize their taxes. Steve can be
reached at 888-61-TAXES or e-mail at info@TraderTaxCoach.net.
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Risk Disclaimer: Past performance is not indicative of future results. Futures trading involves substantial financial risk. Views of guest commentators do not represent those of TradingPub.com. Article intended for educational purposes only and not meant in anyway as a solicitation to buy or sell certain securities. Please consult your personal financial adviser before using this information for your own trading purposes.