Consider wash sales, Section 475 elections, entities, TTS, estimated taxes and tax reform.
Securities traders must comply with wash sale loss rules (Section 1091) and the IRS makes it more difficult for them by applying different rules for taxpayers vs. brokers on tax reports and Form 1099-Bs. Taxpayers must report wash sales on substantially identical positions across all accounts, whereas brokers report only identical positions per account. Use a good trade accounting program or service to identify potential wash-sale loss problems. In taxable accounts, break the chain by selling the position before year-end and not buying a substantially identical position back 30 days before or after in any of your individual taxable or IRA accounts. (Starting a new entity effective Jan. 1, 2017 can break the chain on individual account wash sales at year-end 2016 provided you don’t purposely avoid wash sales with the related party entity.) Read Strategies To Avoid Wash Sale Losses in Chapter 4.
Section 475 elections
Business traders qualifying for trader tax status (TTS) like Section 475 on securities for exemption from wash-sale rules and capital loss limitations. Section 475 ordinary losses contribute to NOL refunds. Individuals can elect Section 475 by April 18, 2017 for 2017 (March 15 for existing S-Corps and partnerships). (The IRS changed the due date for partnership tax returns to March 15 from April 15 starting in 2017.)
A “new taxpayer” entity can elect Section 475 within 75 days of inception. Consider that for 2017, especially later in the year. But it’s too late to form a new trading entity by late November and still qualify for TTS in that short period before year-end. Unlock employee benefit plan deductions for traders with an S-Corp trading company or C-Corp management company with a trading partnership. Sole proprietor traders can’t have employee benefit plan deductions since trading income is not self-employment income (SEI). An entity formed late in the year can unlock employee benefit plan deductions for an entire year by paying officer wages in December.
Trader tax status
If you qualify for TTS (business expense treatment — no election needed) in 2017, accelerate trading expenses into that qualification period as a sole proprietor or entity. If you won’t qualify until 2018, defer trading expenses until then. You may also capitalize and amortize Section 195 startup costs in the new business, going back six months before commencement. Business expense treatment is far better than investment expense treatment. Read our blog post Many Ways Traders Can Save Taxes Before Year-End.
Many traders omit or underpay Q1, Q2 and or Q3 2017 estimated tax vouchers since they think they could lose money later in the year. Q4 is the time to catch up based on actual profit or loss. Don’t overlook the “prior year safe harbor” rule: You only have to cover 100% of 2016 taxes, 110% if AGI was over $150,000, with the balance of 2017 taxes payable April 15, 2018.
Tax reform in 2017
President Trump and leaders of the Republican-controlled Congress say tax reform is a priority in 2017. Use Green’s 2017 Trader Tax Guide for preparing 2016 tax returns based on current tax law, and for tax planning during 2017. Stay informed about tax reform on the GreenTraderTax.com blog.
For more in-depth information on tax planning read Green’s 2017 Trader Tax Guide.