Trader Vs. Investor
|The significance of this distinction is that if you are considered by the IRS to be an "Investor" then your taxation is governed by the rules applicable to investors. If you are considered to be a "Trader" your taxation is governed by the rules applicable to businesses. It has frequently been said that having a business is the one of the greatest tax reduction opportunities available.
TAX BENEFITS FOR TRADERS
The benefits listed below are available only to qualified traders and not to investors.
- Necessary trading expenses such as real time quotes, charting services, data feeds, online news services are 100% deductible on Schedule C totally bypassing the 2% and 3% itemized deduction limitations on Schedule A
- Trading seminar expenses and related travel, meals and entertainment are deductible
- Margin interest is fully deductible, as is other interest from debt used for trading capital
- Meals with other traders to discuss strategies or products are deductible subject to limitations
- Elect Section 179 for equipment purchased and placed in service in 2016 and it can be expensed immediately (maximum limit of $ 500,000 for tax year 2016) rather than depreciated over several years. This election applies to business property such as computers, cell phones, office furniture and equipment, books, etc. or equipment purchased in 2016 and expense immediately up to $ 500,000
- Deduct 100% of direct and an applicable percentage of indirect home office expenses if IRS requirements are met.
- Traders can elect Section 475 Mark-to-Market Accounting Treatment opening up a variety of new tax reduction planning opportunities
ADDITIONAL BENEFITS FOR TRADERS ELECTING IRC SECTION 475 MARK-TO-MARKET ACCOUNTING TREATMENT
- The $3000 limitation on deductible capital losses does not apply. Trading losses are transformed into ordinary income which are fully deductible with no limitation
- Net operating losses can be carried back 2 years to offset prior years' income and to obtain a refund of taxes paid on income in prior years
- Net operating losses created by ordinary trading losses can be carried forward to offset future income
- Deferred losses on wash sales are fully deductible against gains and cumbersome record keeping requirements related to wash sales are eliminated
- Easier to segregate and report investment profits (potential long term capital gains) from trading profits by using separate accounts
Traders | MTM Traders | Section 475 Election | Investors