Business tax-filing status can help some traders trim Uncle Sam’s bill.
Hey you, titan of the home office. Are you trading so often these days you’ll spend minutes readjusting your monitor or your chair a millimeter at a time to get it just right?
If you’re detailed when it comes to seats and screens, you should care equally about tax details. Only serious traders need apply. But for those who qualify, paperwork pain now might pay off later. That’s because if you trade as a business, rather than as an individual investor, you might realize important tax advantages.
Sure, setting up a separate entity, and keeping up with the bookkeeping and regular filing required by the IRS, takes time and money. But, once established, you’ll get tax breaks on items you buy anyway. Think software, skills courses, office furniture, and gadgets—trading-related expenses you can legally deduct. In some cases, you can expense the cost of health insurance, too.
There’s more. Trading as a business entity allows qualifying traders to avoid the wash-sale rule. Instead, elect Section 475, which uses mark-to-market accounting. Stay with us. We’ll explain.
A wash sale occurs when an investor purchases a stock within 30 days prior, or 30 days after they sell the same (or very similar) position at a loss. According to the rule, the investor cannot record a capital loss on the trade if the same position is bought again within 30 days. Therefore, if tax time is approaching, and you want to sell that losing stock position for a tax benefit, the wash-sale rule prevents you from buying it back within 30 days as an individual investor.
Electing Section 475 within a trading business changes your accounting methodology to mark-to-market. With this approach, when taxes are prepared, all open positions are treated as if they were closed on December 31. You don’t need to sell or liquidate anything in order to record a capital loss on losing positions. In addition, Section 475 allows traders to book losses greater than $3,000 per year, and carry some losses over to future filing periods. Consult your tax guru or the IRS site for more information. Keep in mind: you must elect Section 475 when you establish your business taxfiling status, not at filing time.
The simplest way to transition from an individual investor to a trading business is to set up a sole proprietorship, or limited liability company (LLC). This status hinges on your ability to demonstrate “regular, frequent, and continuous” trading, according to IRS rules. Alternatively, a trader can set up a business by incorporating under “Subchapter S,” or other corporate entities. Consult irs.gov for details on more complex filing status options, and to determine eligibility.
Mulling whether to go pro? Here’s a side-by-side comparison:
For important upcoming dates, visit the Tax Document Calendar at the Tax Center. Log in to your account at tdameritrade.com, and go to: Accounts > Tax Center > Tax Document Calendar.
The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2021 Charles Schwab & Co. Inc. All rights reserved.