Day Trader Taxes

Self Employment Taxes

2012-01-25T11:47:00.000-08:00

Issue Number: IRS Tax Tip 2012-16

Tax Tips for the Self-employed

NOTE: Day Traders are not subject to SE tax only income tax and if you have not made the 475f election, then capital gains tax(see #2). The information below is from the IRS.GOV web site and I thought it would be useful since most traders are self employed.

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.
Here are six key points the IRS would like you to know about self-employment and self- employment taxes:
1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.
2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.
3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.
4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.
5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
For more information see the Self-employment Tax Center, IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

Links:
Publication 334, Tax Guide for Small Business
Publication 535, Business Expenses
Publication 505, Tax Withholding and Estimated Tax
Schedule C, Profit or Loss from Business and instructions
Schedule C-EZ, Net Profit from Business
Schedule SE, Self-Employment Tax and instructions
Form 1040-ES, Estimated Tax for Individuals

Upcoming Tax Season

2011-12-16T07:32:00.000-08:00

This is to let you know that I will not be preparing tax returns this upcoming tax season. I am currently referring my clients to Buddy Hartmann of Hartmann & Company in Madison, CT. Buddy specialized in taxes for day traders and can assist you with your tax needs. Please contact Buddy at 203-318-1488 or info@hartmanncompany.com

DISCLAIMER: CK Accounting Tax Service, LLC receives a referral fee from Hartmann & Company Inc. for all referrals. CK Accounting Tax Service, LLC is not responsible for the actions of Hartmann & Company, Inc.

I will continue to update my blog with information for day traders. Please also visit DayTradingradio.com for live trading and stock market commentary

Keeping good records- low volume of trades

2010-12-12T06:12:00.001-08:00

I am currently involved in an audit with one of my clients and the main issue at stake is whether or not my client had enough trades to qualify as a trader. My client has been a day trader since 2002 and made the 475f election years ago. There is no doubt that my client is a full time trader in my opinion. The taxpayer is in front of the computer 8-10 hours a day looking for setups, researching and trading and the trading income is their only source of income. The issue arises in the year that they traded options and the volume of trades is considerably low.
The client may be able to prove that she has been trading full time even though she only executed trades on 26% of the available trading days because she kept a journal of all trades that she was looking at on a daily basis. She dated the pages and even though the notes are not very presentable to an IRS agent, she does have the daily logs available to submit as evidence that she was in fact working on 95% of the available trading days.
Also in her favor is she was trading only options and perfect setups for options trading are not always available on a daily basis.
The IRS agent is using the court case William G. HOLSINGER and Joann Mickler, Peti-tioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. No. 15563-06. Aug. 11, 2008. I will post the summary of this case in a second blog entry.
I will you updated as to the outcome of the audit. In the meantime I just wanted to remind traders that the number one variable being looked at to determine if she qualifies as a trader is the volume of trades. I also want to stress that it is important to keep some sort of log on a daily basis.
-Courtney Kurisko, CPA

William G. HOLSINGER and Joann Mickler, Peti-tioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. No. 15563-06. Aug. 11, 2008

2010-12-12T06:10:00.000-08:00

United States Tax Court.
William G. HOLSINGER and Joann Mickler, Peti-tioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
No. 15563-06.

Aug. 11, 2008.

Background: Taxpayers petitioned for redetermina-tion of federal income tax deficiencies.

Holdings: The Tax Court, Vasquez, J., held that:
(1) net losses from purchases and sales of securities for two tax years at issue were capital losses and only partially deductible, and
(2) expenses that taxpayers attributed to securities trading activity were not deductible as business ex-penses.

Decision for IRS.

[1] Internal Revenue 220 3396

220 Internal Revenue
220V Income Taxes
220V(I) Deductions
220V(I)3 Losses
220k3396 k. Trade or Business. Most Cited Cases
Taxpayers were investors, rather than traders in secu-rities, and thus, net losses from purchases and sales of securities for two tax years at issue were capital losses and only partially deductible; taxpayers' trad-ing was not substantial, as they traded on less than 40% of trading days in first year and less than 45% of trading days in second year, and taxpayers did not seek to catch swings in daily market movements and to profit from these short-term changes, as they rarely bought and sold on same day, and significant amount of their holdings was held for more than 31 days. 26 U.S.C.A. § 475.

[2] Internal Revenue 220 3396

220 Internal Revenue
220V Income Taxes
220V(I) Deductions
220V(I)3 Losses
220k3396 k. Trade or Business. Most Cited Cases
Because taxpayers' securities trading activity did not rise to level of business of trading securities, ex-penses they attributed to that activity, even if incurred on their corporation's behalf, were not deductible as business expenses. 26 U.S.C.A. § 6001; 26 C.F.R. § 1.6001-1(a).
V. Jean Owens and James S. Eggert, for petitioners.

Stephen R. Takeuchi, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge.

*1 Respondent determined deficiencies of $54,462 and $43,423 in petitioners' 2001 and 2002 Federal income taxes, respectively. Respondent amended his answer and increased petitioners' 2001 deficiency by $20,278, for a total 2001 deficiency of $74,740. After concessions by both parties, the issues for decision are: (1) Whether losses from purchases and sales of securities are deductible by petitioners as ordinary losses or are instead subject to the limitations appli-cable to capital losses; and (2) whether expenses at-tributable to those purchases and sales are deductible by petitioners as business expenses or are instead subject to the limitations applicable to itemized de-ductions.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and the attached ex-hibits are incorporated herein by this reference. At the time they filed the petition, petitioners resided in Florida.

William Holsinger (petitioner) retired in 1992, having worked approximately 30 years for Eli Lilly & Co. In 1999 petitioners married. In 2000 petitioners began buying and selling stocks, earning approximately $280,000 from that source during 2000. Petitioner opened brokerage accounts in his name, using his Social Security number. Petitioners reported their trading FN1 income as capital gains in 2000.

On April 19, 2001, petitioners incorporated Alpha Trading Co. of Sarasota, L.L.C. (Alpha) under the laws of Florida. Petitioner owns 67 percent of Alpha, and petitioner Mickler owns the remaining 33 per-cent. On or about May 17, 2001, Alpha made a timely election pursuant to section 475(f) to use the mark-to-market method of accounting.FN2

Petitioners maintained two trading accounts with E-Trade, two with Options Xpress, and one with Ameritrade-Comdisco. From April 19 until Decem-ber 31, 2001, petitioners executed approximately 289 trades on their various trading accounts. In 2002 peti-tioners executed approximately 372 trades.

In 2001 petitioners claimed an ordinary loss of $180,174 FN3 from Alpha on their 2001 Schedule E, Supplemental Income and Loss. The loss consists of trading losses of $178,870, depreciation of $1,284, and interest of $40. The aggregate cost or other basis of the securities sold in 2001 was $933,147. The sale prices in 2001 collectively were $754,277. Also in 2001 petitioners claimed a net loss of $80,100 on their Schedule C, Profit or Loss From Business. Re-spondent disallowed the $80,100 as business ex-penses but allowed itemized deductions for invest-ment interest of $7,620 and miscellaneous deductions of $72,480. After adjustments for gross income limi-tations, respondent allowed net itemized deductions of $69,153.

In 2002 petitioners claimed an ordinary loss of $45,521. This loss comprises $11,227 in trading losses related to Alpha and $34,294 in claimed busi-ness expenses related to Alpha. Respondent disal-lowed the $34,294 as business expenses but allowed a net itemized deduction of $26,181.

*2 After petitioner incorporated Alpha, he did not switch the name on his trading accounts. Petitioner's Social Security number also remained on the trading accounts. Petitioners continued to trade stocks and options during 2001 and 2002 with the accounts they had used before the incorporation of Alpha. In De-cember 2002 petitioners had one trading account in Alpha's name. During the years in issue petitioners used five accounts to conduct trades.

Petitioners traded from a room in their house. The room contained computers with Internet access in order for petitioners to trade and do research. Addi-tionally, petitioner had four monitors connected to his computer because he wanted to be able to trade and track different investments and potential investments simultaneously. Petitioner purchased the computer equipment around July 1, 2000, before incorporating Alpha. None of the computer equipment was trans-ferred to Alpha.

OPINION

I. Mark-to-Market Election

Respondent concedes that Alpha made a timely mark-to-market election pursuant to section 475(f). Section 475(f) applies only to those engaged in a trade or business as traders in securities. Having made a timely election, if Alpha were a trader in se-curities, it would be eligible to recognize gain or loss on any security held in connection with such a trade or business at the close of any taxable year as if the security were sold at its fair market value on the last business day of the taxable year. See sec. 475(f)(1)(A)(I). In general any gains or losses with respect to the securities, whether deemed sold at year end under the mark-to-market method of accounting or actually sold during the taxable year, shall be treated as ordinary income or loss. Sec. 475(d)(3)(A)(I). If Alpha is considered an investor in securities, the 2001 and 2002 net losses from the pur-chases and sales of securities would be capital losses and only partially deductible to petitioners.

II. Trade or Business

[1] The Internal Revenue Code does not define the term “trade or business” for purposes of section 162. Commissioner v. Groetzinger, 480 U.S. 23, 27, 107 S.Ct. 980, 94 L.Ed.2d 25 (1987); Estate of Yaeger v. Commissioner, 889 F.2d 29, 33 (2d Cir.1989), affg. T.C. Memo.1988-264. Whether activities constitute a trade or business is a question of fact. See Higgins v. Commissioner, 312 U.S. 212, 217, 61 S.Ct. 475, 85 L.Ed. 783 (1941); Estate of Yaeger v. Commissioner, supra at 33; Mayer v. Commissioner, T.C. Memo.1994-209; Paoli v. Commissioner, T.C. Memo.1991-351. Petitioners have neither claimed nor shown that they satisfied the requirements of sec-tion 7491(a) to shift the burden of proof to respon-dent with regard to any factual issue. Accordingly, petitioners bear the burden of proof. See Rule 142(a).

Petitioners argue that they were traders, trading as agents of Alpha. With the incorporation of Alpha, petitioners argue they became traders. In determining whether a taxpayer's trading activity constituted a trade or business, courts have distinguished between “traders” and “investors”. Moller v. United States, 721 F.2d 810, 813 (Fed.Cir.1983); see also Levin v. United States, 220 Ct.Cl. 197, 597 F.2d 760, 765 (1979).

*3 In determining whether a taxpayer is a trader, nonexclusive factors to consider are: (1) The tax-payer's intent, (2) the nature of the income to be de-rived from the activity, and (3) the frequency, extent, and regularity of the taxpayer's securities transac-tions. Moller v. United States, supra at 813. For a taxpayer to be a trader the trading activity must be substantial, which means “ ‘frequent, regular, and continuous enough to constitute a trade or business' “ as opposed to sporadic trading. Ball v. Commissioner, T.C. Memo.2000-245 (quoting Hart v. Commis-sioner, T.C. Memo.1997-11). A taxpayer's activities constitute a trade or business where both of the fol-lowing requirements are met: (1) The taxpayer's trad-ing is substantial, and (2) the taxpayer seeks to catch the swings in the daily market movements and to profit from these short-term changes rather than to profit from the long-term holding of investments. Mayer v. Commissioner, supra.

As to the first requirement, we find petitioners' trad-ing was not substantial. Courts consider the number of executed trades in a year and the amount of money involved in those trades when evaluating whether a taxpayer's trading activities were substantial. See, e.g., Mayer v. Commissioner, supra; Paoli v. Com-missioner, supra. In Paoli, the Court held trading activities were substantial when the taxpayers traded stocks or options worth approximately $9 million. In Mayer, the Court considered over 1,100 executed sales and purchases in each of the years at issue therein to be substantial trading activity. Trading ac-tivity was found to be insubstantial when a taxpayer executed at most 83 purchases and 41 sales in one year and 76 purchases and 30 sales in the second year. Moller v. United States, supra at 813. In 2001 petitioners executed approximately 289 trades. An analysis of petitioners' trading activity reveals that in 2001 they traded on 63 days. This total represents less than 40 percent of the trading days from April 19, 2001, the day petitioners incorporated Alpha, until December 31, 2001. In 2002 petitioners traded on 110 days and executed approximately 372 trades. This total represents less than 45 percent of the trad-ing days in 2002. We find it doubtful whether the trades were conducted with the frequency, continuity, and regularity indicative of a business.

As to the second requirement, petitioners have failed to prove that they sought to catch the swings in the daily market movements and to profit from these short-term changes rather than to profit from the long-term holding of investments. Petitioner testified that his goal in forming Alpha was to profit from short-term swings in the market. Additionally, peti-tioner testified that he usually closed his account at the end of the day and tried to avoid holding stocks and options overnight. The documentary evidence, however, paints a different picture. A list of petition-ers' trades shows they rarely bought and sold on the same day. Furthermore, a significant amount of peti-tioners' holdings was held for more than 31 days. As a result, we find that petitioners have not demon-strated that they sought to capture the daily swings in the market. We find that they were not traders, but investors. Petitioners' trading pattern is consistent with that of an investor, not of a trader.

III. Business Expenses

*4 [2] Deductions are a matter of legislative grace, and the taxpayer has the burden of showing entitle-ment to any deduction claimed. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84, 112 S.Ct. 1039, 117 L.Ed.2d 226 (1992). Taxpayers must substantiate amounts claimed as deductions by maintaining the records necessary to establish such entitlement. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.; see Hradesky v. Commissioner, 65 T.C. 87, 1975 WL 3047 (1975), affd. per curiam 540 F.2d 821 (5th Cir.1976).

Petitioners claimed business deductions for 2001 and 2002. Petitioners argue that their trading activity was on behalf of Alpha, not for themselves as individuals. Petitioners claim they were Alpha's agents and there-fore had the authority to conduct trades on its behalf. Even if petitioners acted on Alpha's behalf, because their activity, as we have already found, did not rise to the level of a business (the business of trading se-curities), the expenses petitioners attributed to that activity, even if incurred on Alpha's behalf, are not deductible as business expenses.

In reaching all of our holdings herein, we have con-sidered all arguments made by the parties, and to the extent not mentioned above, we find them to be ir-relevant or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

FN1. The use of the term “trading income” is not a conclusion that petitioners or Alpha were engaged in a business of trading in se-curities.

FN2. Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FN3. The 2001 ordinary loss petitioners claimed on Schedule E is $20 less than the total claimed of the trading losses, deprecia-tion, and interest. Both parties have stipu-lated the amounts, and there appears to be no explanation for the $20 discrepancy. The $20 discrepancy has no effect as to the out-come of the case.

U.S.Tax Ct.,2008.
Holsinger v. C.I.R.
T.C. Memo. 2008-191, 2008 WL 3286960 (U.S.Tax Ct.), 96 T.C.M. (CCH) 85, T.C.M. (RIA) 2008-191, 2008 RIA TC Memo 2008-191

END OF DOCUMENT

Wash sale rules

2010-09-01T11:56:00.000-07:00

If you are a day trader and have not made the mark to market election 475f, you are subject to wash sales rules. Wash sale rules are as follows, if you sell a security or a contract or option to buy a stock at a loss and then buy the same security within a 30 day period then that loss is disallowed. The time period is 30 days before and after the sale.
The disallowed loss is actually deferred- it is added to the basis of the replacement stock and your holding period for the replacement stock includes the holding period for the security that you sold.
The wash sale rule only applies to losses and does not apply if you have made the mark to market election.
-Courtney Kurisko
Certified Public Accountant

Self Employment Taxes

2010-04-26T10:25:00.000-07:00

Traders that trade securities are not subject to self employment taxes. This applies whether or not you made the 475f election or not.

On a side note, older court cases have dealt with this issue and the tax payer should be aware of this. See the journal of accountancy article: http://www.journalofaccountancy.com/Issues/2001/Jan/DayTradingAndSelfEmploymentTaxes.htm

-Courtney Kurisko, CPA
www.ckaccountingandtaxation.com

Visit me at the Traders Expo in NYC Feb 15 & 16th

2010-02-04T12:26:00.000-08:00

I will be attending the Traders Expo on Feb 15th and 16th in NYC. Please visit me at me the Day Trading Radio booth #5309.
Courtney Kurisko
CK Accounting Tax Service, LLC
www.ckaccountingandtaxation.com

Software to use to report trades for tax purposes

2010-01-04T12:40:00.000-08:00

I have received numerous emails asking which software day traders should use to report the large quantity of trades on their tax returns. If you have not filed for the 475(f) mark to market election, you can just use your annual broker statements to attach to your tax return. If you have made the 475(f) election then you need software to compile the gain/loss reports because you are no longer subject to the wash sale rules and you have to mark your open positions as of 12/31/09 to the market price. The broker statements will not do this for you. I use Tradelog software for my clients. The software is very efficient.
If you have any further questions or need assistance filing your taxes, please contact me at ckaccountants@yahoo.com
-Courtney Kurisko
Certified Public Accountant
CK Accounting Tax Service, LLC

Examples of Expenses for Day Trading Businesses

2009-11-04T06:26:00.000-08:00

The following are examples of business expenses for Day Traders:

•Tax preparation fees and legal fees
•Subscriptions to financial magazines and newspapers
•Research materials
•Custodial fees
•Seminars and ongoing education
•Online memberships, including chat rooms, newsletters and subscriptions to news
•Real-time quotes and charting software
•Most start-up and early organization expenses incurred after October 22, 2004
for an entity are fully deductible up to $5,000 in the first year
•Utilities including telephone, cable and on-line services
•Office rent (but not if paid to yourself)
•Office supplies, postage, bank charges and wire fees
•Administration expenses
•Wages and employment taxes, including wages paid to your family for assistance
with your trading business
•Retirement plans, if deductible
•Interest expense paid on loans to the business and margin interest
•Depreciation on furniture, computer equipment and software related to your
business
•Travel (for example to attend trade shows)
•Auto mileage rate 2009 @ 55¢/mile
•Home office expense
•50% deductible restaurant meals if properly documented

The following are deductible to certain types of entities:

•Fully deductible medical & health care
•Child care and other §125 cafeteria plan deductions
•Other fringe benefit plans, if applicable to trading business

Why form an entity

2009-10-19T07:56:00.001-07:00

In my opinion, some of the benefits to forming a corporation or LLC for trading are to solidify your business activities and expenses with the IRS. Also, reporting millions of dollars in trades on your personal tax return is more likely (again, my opinion) to be recognized by the IRS versus having millions in trades through a corporation or LLC.
You can also benefit from more deductions though the entity and you have more options when it comes to retirement planning.
One more reason is if you need to make the mark to market election for a tax year but you did not file the election in a timely manner then you have the option of forming and entity and making the election within 2 months and 15 days of the formation of the corporation or LLC. Be careful though, you really need good tax planning before going about this without professional tax advice.
This is general information and is only a guideline.
-Courtney Kurisko, CPA
www.ckaccountingandtaxation.com

New Tax Law ARRA of 2009

2009-06-18T10:24:00.000-07:00

Congress is keeping us CPA's very busy lately following the new tax laws. Here is a summary of the new tax laws in the American Recovery and Reinvestment Act of 2009 (ARRA). They may not necessarily apply to your day trading business but they could still put money in your trading account.

First, the new home buyer provision that we have all heard about. $8000 credit if purchased in 2009 on first time principal residence and does not have to be repaid unless you move out or sell within 36 months of the purchase date.

$250 payments or credit on your 2009 tax return to individuals eligible for Social Security, veteran's compensation or pension benefits from November 2008 to January 2009 (have to be a US Resident).

Small businesses with a net operating loss (NOL) in 2008 can elect to offset this loss against income earned in up to five prior years. Typically, an NOL can be carried back for only two years.

Individuals with children under the age of 17 may be eligible for an increased child tax credit. The minimum earned income amount used to calculate the tax credit has been lowered so more people are eligible for the credit.

You can deduct sales tax paid on your new vehicle purchase or if you do not live in a state with sales tax you can deduct other taxes and fees.

If you are interested in how you could benefit from the new tax laws, please feel free to contact me. There are other benefits in the ARRA of 2009 that I have not covered here.

-Courtney Kurisko
Certified Public Accountant

475 f election - statement to attach

2009-03-23T06:44:00.000-07:00

For entities:
The following statement should be stated in the entities books and records within 75 days of formation. Also attach a copy of it to the 2009 tax return filed in 2010.

The statement must include the following information.

1. That you are making an election under section 475(f) of the Internal Revenue Code.
2. The first tax year for which the election is effective.
3. The trade or business for which you are making the election.
4. That the election only applies to securities and not to futures.

Do not file form 3115. The entity is not making a change to their accounting method.

For individuals:

Attach a statement including the following:
The statement must include the following information.

1. That you are making an election under section 475(f) of the Internal Revenue Code.
2. The first tax year for which the election is effective.
3. The trade or business for which you are making the election.
4. That the election only applies to securities and not to futures.

The statement should be filed by April 15th 2009 for 2009 tax year. This means it should be attached to your extension or tax return. Form 3115 does not get filed at this time, it gets filed with your 2009 tax return in 2010.

For both entities and individuals:

If you made the mark-to-market election, you should report all gains and losses from trading as ordinary gains and losses in Part II of Form 4797, instead of as capital gains and losses on Schedule D. In that case, securities held at the end of the year in your business as a trader are marked to market by treating them as if they were sold (and re-acquired) for fair market value on the last business day of the year. The wash sale rules no longer apply if you make the election.

This information is only a guide as to how you approach filing as a day trader. Please consult your tax preparer for more information or contact me at ckaccountants@yahoo.com

Day Trader vs. Investor - IRS discussion

2009-02-12T07:56:00.000-08:00

This is directly from the IRS web site and it details the difference between a Day Trader and an Investor.

http://www.irs.gov/taxtopics/tc429.html

Topic 429 - Traders in Securities (Information for Form 1040 Filers)

This tax topic explains whether an individual who buys and sells securities qualifies as a "trader in securities," and how traders must report the income and expenses resulting from the trading business. In order to better understand the special rules that apply to traders in securities, it is helpful to first review the meaning of the term "investor," and the manner in which investors report the income and expenses relating to their investment activities.

Investors typically buy and sell securities and expect income from dividends, interest, or capital appreciation. Sales of these securities result in capital gains and losses that must be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses. Investors are subject to the capital loss limitations described in section 1211(b), in addition to the section 1091 wash sales rules. Investors can generally deduct the expenses of producing taxable investment income. These include expenses for investment counseling and advice, legal and accounting fees, and investment newsletters. These expenses are deductible on Form 1040, Schedule A (PDF), Itemized Deductions, as miscellaneous deductions to the extent that they exceed 2% of adjusted gross income. Interest paid on money to buy or carry investment property that produces taxable income is also deductible on Schedule A, but under section 163(d) the deduction cannot exceed the net investment income. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss upon disposition of the securities. An investor is not subject to self-employment tax. For more information on investors, refer to Publication 550, Investment Income and Expenses.

Traders

Special rules apply if you are a trader in securities, in the business of buying and selling securities for your own account. To be engaged in business as a trader in securities, you must meet all of the following conditions:

* You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.
* Your activity must be substantial, and
* You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a securities trading business:

* Typical holding periods for securities bought and sold.
* The frequency and dollar amount of your trades during the year.
* The extent to which you pursue the activity to produce income for a livelihood, and
* The amount of time you devote to the activity.

If the nature of your trading activities does not qualify as a business, you are considered an investor, and not a trader. It does not matter whether you call yourself a trader or a "day trader." Further, a taxpayer may be a trader in some securities and hold other securities for investment. The special rules for traders do not apply to the securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day he or she acquires them.

Traders report their business expenses on Form 1040, Schedule C (PDF), Profit or Loss From Business. The limit on investment interest expense, which applies to investors, does not apply to interest paid or incurred in a trading business. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss upon disposition of the securities. Gains and losses from selling securities as part of a trading business are not subject to self–employment tax.

The tax treatment of sales of securities held in connection with a trading business depends on whether a trader has previously made an election under section 475(f) to use the mark-to-market method of accounting. If the mark-to-market election was not made, then the gains and losses from sales of securities are treated as capital gains and losses that must be reported on Form 1040, Schedule D (PDF). Both the limitations on capital losses and the wash sale rules continue to apply. However, if the mark-to-market election was timely made, then the gains and losses from sales of securities are treated as ordinary gains and losses (except for securities held for investment — see above) that must be reported on Part II of Form 4797 (PDF), Sales of Business Property. Further, neither the limitations on capital losses nor the wash sale rules apply to traders using the mark-to-market method of accounting.

In general, the mark-to-market election must be made by the due date (not including extensions) of the tax return for the year prior to the year for which the election becomes effective. The election is made by attaching a statement either to your income tax return or to a request for an extension of time to file your return. The statement should include the following information:

1. That you are making an election under section 475(f) of the Internal Revenue Code;
2. The first tax year for which the election is effective; and
3. The trade or business for which you are making the election.

Refer to the Form 1040, Schedule D Instructions for further instructions on how to make the mark to market election.

After making the election to change to the mark-to-market method of accounting, you must change your method of accounting for securities under Revenue Procedure 2002–9. In addition to making the election, you will also be required to file a Form 3115 (PDF), Application for Change in Accounting Method. The procedures for making an election are described in Publication 550 under the section called "Special Rules for Traders in Securities", and FAQ's on our Web site.

Year End Tax Planning for Day Traders

2009-02-02T09:10:00.000-08:00

It is that time of year again! If you qualify as a day trader, here are some things you should understand:
1) If you did not make the mark to market election or form a corporation for day trading, your trades will be reported on Schedule D and your expenses related to your trading business will be reported on Schedule C. This means that your accountant will need expenses such as internet, dues and subscriptions, hardware expenses, trading software, investment publications, margin interest (100% on Schedule C), educational, etc. You will need to attach a statement to your schedule C business since it will be showing a loss. The statement should explain that your income (if you have gains) is reported on schedule D.
2) If you did make the Mark to Market election for 2008, then your gains and losses should be reported on Part II of Form 4797 (Sales of Business Property). Also attach a statement to your Schedule C (see #1). The election had to be made by April 15th of 2008 for the tax year ending 2008, unless you formed a trading corporation during the year. So if you had losses for 2008, you may want to reconsider not making the election for 2009 also. This is something to discuss with a CPA.
3) If you are making the Mark to Market election for 2009, you will need to attach Form 3115 to your tax return or extension by April 15th, 2009 since it is a change in accounting method.

Hopefully your broker will be able to provide a schedule of your gains and losses for the year. Your brokerage statement will not be available this year until after February 15, 2009 due to current tax law changes. If you made the Mark to Market election, you will have adjust the statement that your broker gives you to disregard the wash sale rule and to adjust the securities that you were holding as of 12/31/08 to the market value. Make sure to report these separately.

CK Accounting Tax Service has the ability to assist you in filing your day trader taxes, make the market to market election and compile either your schedule D or Form 4797. I use software that allows me to make the Mark to Market election and disregard the wash sales.

Please contact me at ckaccountants@yahoo.com if you would like to discuss further.
-Courtney Kurisko
Certified Public Accountant

Year End Tax Summary coming next week

2009-01-23T12:36:00.000-08:00

Hi Everyone,
I just wanted to let you know that a summary of year end tax preparation will be posted next week. I have neglected my blog this last month and will be keeping everyone current starting next week.
-Courtney Kurisko

How to report Section 1256 contracts (futures)

2008-12-17T11:46:00.001-08:00

According to IRS Publication 550, a "Section 1256 Contract" is a regulated futures contract, foreign currency contract, or a non-equity option. All of these are marked to the market value at the end of the tax year. This is not the same as making the mark to market election (475f). These trading instruments are reported on Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles) and not schedule D with stock sales. They are considered 60% long term capital gain or loss and 40% short term capital gain or loss for tax purposes. That is good news for 60% of your gains!! More good news is that you do not need to submit the detail of your trades for these instruments to the IRS!! But, you do need to have them on file for 7 years in case the IRS would like to see the detail.
Also, a special carry back rule applies to Section 1256 contracts. You can carry back the losses for 3 years if you have a Section 1256 gain in those years. You cannot create a net operating losses but you can offset the gains in those years.
Should you have any further questions, please contact me at ckaccountants@yahoo.com.
Best,
Courtney Kurisko

Las Vegas Trade Show

2008-11-13T10:27:00.000-08:00

With the Las Vegas trade show approaching next week, I thought I would give a little information as to the deductions available for traveling to the trade show. And if you have a booth at a trade show and plan on selling anything, there a few things you should know.
Trade Show Deductions
If you trip is 100% business, then it is 100% deductible (except meals and entertainment at 50%). This includes your airfare, lodging, registration expenses, tips, business calls, dry cleaning, etc.
If your trip is 70% business and 30% fun, then take the ratio of all of your expenses. For example, you are staying a few days after the trade show or only going to the trade show for 2 days instead of the full 4 days, then half of your expenses would be deductible.
Selling Products or Services at the Trade Show
If you are planning on selling services at the trade show in Las Vegas next week, you are exempt from sales tax but you still have to file for a business license. You can do this online at http://tax.state.nv.us/ and the fee is $100. If you are selling goods at the show, you have to file for a business license and sales tax. Although, if you are a home based sole proprietor with a NET income of less than $26,400 then you are exempt from having to file for a business license.
I hope this information helps everyone headed to the trade show. If you have further questions or you are looking for an accountant that specializes in Securities Traders, please email me at ckaccountants@yahoo.com
Best,
Courtney Kurisko

Court ruling on day trader status

2008-08-13T18:11:00.000-07:00

This article is from a tax newsletter that I receive. I thought I would share on my blog. The web site is http://tax.cchgroup.com/news/headlines/2008/nws81208.htm#1

Federal Headlines
Married Couple Were Not Stock "Traders"; Ordinary Losses on Stock Sales Denied (Holsinger, TCM)

A married couple, who bought and sold stocks through their limited liability company (LLC), were not engaged in a trade or business as traders in securities. As a result, the mark-to-market election (Code Sec. 475(f)) made by the LLC was invalid and losses reported by the taxpayers were capital and not ordinary.

CCH Comment. A taxpayer is considered engaged in the trade or business of trading stock if (1) the taxpayer's trading is substantial and (2) the taxpayer seeks to profit from short-term swings in daily market movements. In evaluating whether trading activities are substantial, courts generally consider the number of executed trades in a year and the amount of money involved.

In 2000, the couple began buying and selling stocks and reported approximately $280,000 in capital gains. In April 2001, they formed an LLC and made a mark-to-market election. From April through December, they reported an ordinary loss of approximately $180,000 based on 289 trades of stock with an aggregate basis of $933,000 and a collective sales price of $754,000. In 2002, they executed approximately 372 trades and claimed an ordinary loss of $45,000. They traded on 63 days from April through December 2001 or 40 percent of the possible trading days and on 110 days or 45 percent of the possible trading days in 2002. However, the number of trades and the amount of money involved were not sufficient to qualify the couple as traders.

CCH Comment. For purposes of comparison, the court cited two decisions in which taxpayers were engaged in substantial trading. In the first case, the taxpayers traded stocks or options worth approximately $9 million (S.A. Paoli, DC Ill., 92-1 USTC ¶50,102). In the second case, the taxpayer executed over 1,100 sales and purchases in each of the years at issue (F.R. Mayer, 67 TCM 2949, Dec. 49,838(M), TC Memo. 1994-209). In another case, trading activity was held insubstantial when a taxpayer executed at most 83 purchases and 41 sales in one year and 76 purchases and 30 sales in the second year (J.A. Moller, CA-FC, 83-2 USTC ¶9698, 721 F2d 810).

Furthermore, the taxpayers were not attempting to catch swings in daily market movements. Their records showed that they rarely bought and sold on the same day. Many of the their stocks were held for more than 31 days. This trading pattern was more consistent with that of an investor than a trader.

Since the taxpayers were not engaged in a trade or business, various expenses related to their trading activity were not deductible as business expenses. Deductions of investment interest paid were not allowed to the extent the deductions exceeded the limitation placed on investment income.

W. G. Holsinger, TC Memo. 2008-191, Dec. 57,512(M)
Other References:
Code Sec. 162
CCH Reference - 2008FED ¶8521.1475
Code Sec. 163
CCH Reference - 2008FED ¶9403.45
Code Sec. 475
CCH Reference - 2008FED ¶22,268.55
Tax Research Consultant
CCH Reference - TRC INDIV: 48,450
CCH Reference - TRC SALES: 45,052
CCH Reference - TRC SALES: 45,350

Profits and Taxes

2008-07-22T10:30:00.000-07:00

As a day trader you want to take as many profits as possible but what about the tax consequences? Well, there are a few different ways to look at paying the taxes on your day trading profits. One way to look at it is the profits from day trading are the same as profits from any other vehicle that makes you money, make as much money as you can and then pay as little taxes as possible.

All short term trades (under one year) are subject to capital gains tax determined by your income tax bracket. This could be as much as 35% if you are in the top bracket. Day traders who have made the 475(f) mark to market election are also subject to these tax brackets but they can directly offset their expenses against the income whereas those who are reporting the short term trades on their schedule D cannot.

Each person's tax situation is different and if you are going to take profits on your trades, the best thing to do is keep track of them and have an accountant look at your profits each quarter to determine if you should pay estimated taxes. There are also other ways to manage your taxes such as trading through a corporation or LLC. Again, talk to your tax professional or contact me at ckaccountants@yahoo.com and I can help to advise you.

Basically, if you are making money, most likely you will be paying taxes. But it is not wise to take a loss just to save taxes, as some financial advisers will tell you. If you are thinking of doing that, do the math first. Which will save you more money, the loss in your account or the taxes you pay on your gain.

Filing tax returns for prior years and OIC's

2008-05-19T11:18:00.000-07:00

I have just reduced one of my day trader clients tax bills from $180,000 to $18,000!!!! I did this through an Offer in Compromise for my clients 1999 taxes. About 2 years ago he received various notices from the IRS for his tax years 1999-2002 stating that he owed over $40,000,000 in taxes. He had not filed his taxes for those years because he was a day trader and just didn't get the information together. It was just too overwhelming. He was dreading those notices and he knew they would eventually come.

The $40M in taxes was based on gross proceeds and included interest and penalties. I worked with my client to get the basis for his trades and prepared the tax returns for him. The tax, interest and penalties were reduced to $180,000.

Since my client is no longer in a position to pay the IRS $180,000, we filed an Offer in Compromise. His tax debt is now $18,000.
This was long road but he is now free of the burden of back taxes. He tried other accountants before me but a lot of accountants do not have the software and the know how to deal with thousands of pages of trades for prior years. I dealt with the IRS agent for him so he wouldn't have too.

I have the ability to help day traders that have not filed their prior year taxes. I will work with the agents so you don't have to. I can also help file an OIC for you, if needed.
-Courtney
ckaccountants@yahoo.com

Which Type of Entity? How to Incorporate?

2008-02-07T10:46:00.000-08:00

The type of entity that you choose depends on your personal situation. I can look at your tax situation as a whole and help you to decide which, if any, will be right for you as a Day Trader. Each state has different requirements so please check with your Secretary of State or your Accountant. I can also be of assistance in setting up and filing the taxes for your business as a Day Trader.

There are many benefits to forming an entity. One is that if you are trading and have substantially large gross proceeds, it does not flag your personal tax return for audit purposes. I.e. $50 million in gross proceeds looks a lot different on your personal return than it does on a corporate return. Having a Corporation or LLC is also beneficial for annual comparisons since we all know that one year as a Day Trader can be extremely different from the next. Another reason is you can pay yourself so you have self employment income to make retirement contributions. If you have not made the 475 election, then your Day Trader income is not self employment income and therefore, you cannot make retirement contributions based on this income.
Another benefit to having an entity is if you do make the Section 475 election, you can do it through the entity and then if you choose to not have the election, it is easier to dissolve the entity than to try and change the election as an individual.

Sole Proprietor - As a Trader, you can file your business expenses on your Schedule C and your income on your Schedule D unless you make the Section 475 (mark to market) election. You do not need an Employer Identification Number (EIN) to file. An EIN is beneficial for bank accounts, etc. The only thing you need to do to get an EIN is file a Form SS4 online at WWW.IRS.GOV. If you are not going to get an EIN, then you do not need to do anything except to keep track of your business income and expenses.

Limited Liability Corporation - This entity is taxed as a partnership but with some of the same protection of a Corporation. The LLC is beneficial for Day Traders because the income is not subject to Self Employment tax and you are not required to put yourself on payroll. But it is recommended to pay your self an administration fee for a few different reasons. The administration fee is subject to self employment taxes but allows you to make retirement contributions along with other benefits.

S Corporation - With this entity, you get the asset protection of a C-Corporation. The income and expenses flow through to your personal tax return so you do not have the double taxation of a regular C-Corporation.
A down fall to having an S-Corporation is the IRS expects you to take a payroll. This is not a problem if you are making a profit and payroll is beneficial for you because of retirement planning or other reasons.
To file an S-Corporation, check with the requirements in your state. For federal purposes you want to file Form 2553 by February 15th of the tax year that you are making the election (or 2 months and 15 days after the formation of the S-Corporation). If you do not make a timely election and would like to be treated as an S-Corporation, you can attach Form 2553 to your tax return with an explanation as to why you did not file the election in a timely manner.

A C-Corporation has the asset protection but also has double taxation. The Corporation itself is taxed and the Shareholders are also taxed on the same profits. With a C Corporation, there is also the issue of being subject to a personal holding surtax unless you make the 475F election.

How to form a Corporation or LLC-
1) Pick a name and check with the Secretary of State to see if the name is available.
2) Create the Articles of Incorporation or Articles of Organization
3) Create Bylaws
4) Apply for Federal and State ID#'s (S-Corps Form 2553 for Federal and Articles of Incorporation or Organization with the state)
Please note, every state has different laws as to how to set up an entity.

It is best to have a professional organize your new Corporation for you. I am providing this information to you so that you can have an idea before you talk to your tax professional about setting up your Day Trader business. Please feel free to post any messages here or contact me at ckaccountants@yahoo.com for assistance.
-Courtney Kurisko
Certified Public Accountant

Should I Incorporate My Day Trading Business?

2008-01-25T10:59:00.000-08:00

A big question for day traders is whether or not to incorporate their trading business. Every one's situation is different but it is not always necessary to incorporate. You can file your trading business on your personal tax return- schedule C and report your gains on your schedule D. It is not necessary to incorporate in order to have the IRS recognize you as a day trader. When filing on a schedule C, there are not additional filing charges (except from your Accountant).

It is beneficial to incorporate for a few reasons. One is that your trading income is not subject to self-employment tax. This is beneficial for tax purposes but not beneficial if you would like to have money put into a retirement or if you would like to build up your social security for the future. One benefit of having a corporation is you can pay yourself a salary. This salary allows you to make the retirement contribution and allows you an additional deduction for the salary and the payroll taxes.

Another beneficial reason to incorporate is if you choose to make the 475(f) election (to be discusses in a future blog). Once this election is made, it is extremely difficult to reverse. Therefore, if you make the election through a corporation and choose to reverse the election, it is easier to dissolve the corporation than to reverse the election.
And of course, there is the added protection that a corporation gives you.
If you have further questions, please do not hesitate to post them here or contact me.
-Courtney

Definition of a Day Trader

2008-01-18T10:25:00.000-08:00

Day Traders are basically investors who engage in the purchase and sale of securities and/or commodities for their own accounts. The main difference between investors and traders is that traders trade at such a high level of activity that it becomes a business to them.

According to the Taxpayers' Relief Act of 1997, the taxpayer must trade in stocks, securities, futures contracts, or options on a short term basis and frequently and regularly. The tax court has helped to define a Trader and they looked for someone who:
-Trades on a frequent, regular basis and profit from daily market movements
-Has numerous trades
-Has the majority of their income from trading
-Reports their trading expenses on Schedule C of their tax return and
-Has short-term trades

Traders can deduct their business expenses, including investment interest on their schedule C but the gains are still reported on Schedule D unless the section 475(f) election is made (to be discussed).

Code section 1221

If you would like more information, please contact me at ckaccountants@yahoo.com or respond here.

Day Trader?

2008-01-10T11:30:00.000-08:00

Are you a day-trader looking for tax-tips? Are you interested in learning about filing with the IRS as a day-trader? Or are you a day-trader who needs a CPA to help file their taxes?

I can help each day trader with their personal tax situation. If you are a new day trader or have not taken advantage of the deductions available to you, I can help you file your income tax return as a day trader and so you can take all of the deductions associated with being a trader on your tax return.

Maybe we need to form an S-Corporation for you in order for you to pay yourself a salary.

Or another option, maybe you have large losses in 2007 and large gains in prior years and we should make the 475(f) election for you to carry back your gains to reduce your income over the last two years.

If you are an already established day trader and need a CPA, I can meet your tax filing needs.

I can be very helpful to you when preparing or planning your taxes. I use Tradelog Software to prepare your schedule of trades and can find the best situation for you.

I will also be posting answers to your tax questions here on my blog. For more information about me, please go to www.ckaccountingandtaxation.com

-Courtney Kurisko
Certified Public Accountant