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Defer Capital Gains On Real Estate Using Like-Kind Exchanges

September 15, 2015 | By: Robert A. Green, CPA

(From our Feb. 2015 Monthly Newsletter written by cpasitesolutions)

If you’re a savvy investor, you probably know that you must generally report as income any mutual fund distributions whether you reinvest them or exchange shares in one fund for shares of another. In other words, you must report and pay any capital gains tax owed.

But if real estate’s your game, did you know that it’s possible to defer capital gains by taking advantage of a tax break that allows you to swap investment property on a tax-deferred basis?

Named after Section 1031 of the tax code, a like-kind exchange generally applies to real estate and were designed for people who wanted to exchange properties of equal value. If you own land in Oregon and trade it for a shopping center in Rhode Island, as long as the values of the two properties are equal, nobody pays capital gains tax even if both properties may have appreciated since they were originally purchased.

Section 1031 transactions don’t have to involve identical types of investment properties. You can swap an apartment building for a shopping center, or a piece of undeveloped, raw land for an office or building. You can even swap a second home that you rent out for a parking lot.

There’s also no limit as to how many times you can use a Section 1031 exchange. It’s entirely possible to roll over the gain from your investment swaps for many years and avoid paying capital gains tax until a property is finally sold. Keep in mind, however, that gain is deferred, but not forgiven, in a like-kind exchange and you must calculate and keep track of your basis in the new property you acquired in the exchange.

Section 1031 is not for personal use. For example, you can’t use it for stocks, bonds and other securities, or personal property (with limited exceptions such as artwork).

Properties of unequal value

Let’s say you have a small piece of property, and you want to trade up for a bigger one by exchanging it with another party. You can make the transaction without having to pay capital gains tax on the difference between the smaller property’s current market value and your lower original cost.

That’s good for you, but the other property owner doesn’t make out so well. Presumably, you will have to pay cash or assume a mortgage on the bigger property to make up the difference in value. This is referred to as “boot” in the tax trade, and your partner must pay capital gains tax on that part of the transaction.

To avoid that you could work through an intermediary who is often known as an escrow agent. Instead of a two-way deal involving a one-for-one swap, your transaction becomes a three-way deal.

Your replacement property may come from a third party through the escrow agent. Juggling numerous properties in various combinations, the escrow agent may arrange evenly valued swaps.

Under the right circumstances, you don’t even need to do an equal exchange. You can sell a property at a profit, buy a more expensive one, and defer the tax indefinitely.

You sell a property and have the cash put into an escrow account. Then the escrow agent buys another property that you want. He or she gets the title to the deed and transfers the property to you.

Mortgage and other debt

When considering a Section 1031 exchange, it’s important to take into account mortgage loans and other debt on the property you are planning to swap. Let’s say you hold a $200,000 mortgage on your existing property but your “new” property only holds a mortgage of $150,000. Even if you’re not receiving cash from the trade, your mortgage liability has decreased by $50,000. In the eyes of the IRS, this is classified as “boot” and you will still be liable for capital gains tax because it is still treated as “gain.”

Advance planning required

A Section 1031 transaction takes advance planning. You must identify your replacement property within 45 days of selling your estate. Then you must close on that within 180 days. There is no grace period. If your closing gets delayed by a storm or by other unforeseen circumstances, and you cannot close in time, you’re back to a taxable sale.

Find an escrow agent that specializes in these types of transactions and contact your accountant to set up the IRS form ahead of time. Some people just sell their property, take cash and put it in their bank account. They figure that all they have to do is find a new property within 45 days and close within 180 days. But that’s not the case. As soon as “sellers” have cash in their hands, or the paperwork isn’t done right, they’ve lost their opportunity to use this provision of the code.

Personal residences and vacation homes

Section 1031 doesn’t apply to personal residences, but the IRS lets you sell your principal residence tax-free as long as the gain is under $250,000 for individuals ($500,000 if you’re married).

Section 1031 exchanges may be used for swapping vacation homes, but present a trickier situation. Here’s an example of how this might work. Let’s say you stop going to your condo at the ski resort and instead rent it out to a bona fide tenant for 12 months. In doing so, you’ve effectively converted the condo to an investment property, which you can then swap for another property under the Section 1031 exchange.

However, if you want to use your new property as a vacation home, there’s a catch. You’ll need to comply with a 2008 IRS safe harbor rule that states in each of the 12-month periods following the 1031 exchange you must rent the dwelling to someone for 14 days (or more) consecutively. In addition, you cannot use the dwelling more than the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented out for at fair rental price.

You must report a section 1031 exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with your tax return for the year in which the exchange occurred. If you do not specifically follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions.

While they may seem straightforward, like-kind exchanges can be complicated. There are all kinds of restrictions and pitfalls that you need to be careful of. If you’re considering a Section 1031 exchange or have any questions, don’t hesitate to contact us.


MLPs Can Generate Tax Bills In Retirement Accounts

October 31, 2014 | By: Robert A. Green, CPA

Forbes

MLPs Can Generate Tax Bills In Retirement Accounts

It’s a surprise to many people that MLPs generate taxable income in retirement plans requiring a tax filing and payment of taxes.

Traders and investors are interested in using their IRA and other retirement plan accounts (collectively referred to as “retirement plans”) for making “alternative investments” in publicly traded Master Limited Partnerships (MLPs). Most MLPs conduct business in energy, pipelines, and natural resources. (Learn more about publicly traded partnerships at The National Association of Publicly Traded Partnerships, see its list of PTPs Currently Traded on U.S. Exchanges and read its warning about MLPs and Retirement Accounts.) Retirement plans also make alternative investments in hedge funds organized as domestic limited partnerships or offshore corporations.

Publicly traded partnerships (including MLPs) and hedge fund LPs use the partnership structure as opposed to a corporate structure. That allows organizers to pass through significant tax breaks on a Schedule K-1, including intangible drilling costs (IDC) and depreciation to individual investors. Taxes are paid on the investor/owner level, so the partnership structure avoids double taxation. Conversely, corporations owe taxes on the entity level and investor/owners pay taxes on dividends received from the corporation. (Real Estate Investment Trusts do not use a partnership structure.)

Tax problems for retirement plans investing in MLPs
Most MLPs conduct business activities including energy, pipelines and natural resources. But hedge funds do not — they buy and sell securities, futures, options and forex, which are considered portfolio income activities. Private equity and venture capital funds using the partnership structure also may pass through business activity income.

When retirement plans conduct or invest in a business activity, they must file separate tax forms to report Unrelated Business Income (UBI) and often owe Unrelated Business Income Tax (UBIT). MLPs issue Schedule K-1s reporting business income, expense and loss to retirement plan investor/owners. That’s the problem! The retirement plan then has UBI, and it may owe UBIT. Instead of the MLP being a tax-advantaged investment as advertised, it turns into a potential tax nightmare investment.

Form 990-T
According to Form 990-T and its instructions “Who Must File,” when a retirement plan has “gross income of $1,000 or more from a regularly conducted unrelated trade or business” it must file a Form 990-T (Exempt Organization Business Income Tax Return). While the retirement plan may deduct IDC and depreciation from net UBI, gross income will probably exceed $1,000 causing the need to file Form 990-T. UBIT tax brackets go up to 39.6%, which matches the top individual tax rate. (See the UBIT rates and brackets in the instructions.) File Form 990-T to report net UBI losses so there is a UBI loss carryforward to subsequent tax years.

Don’t overlook the need to file Form 990-T
Noncompliance with Form 990-T rules can lead to back taxes, penalties and interest. It can lead to “blowing up” a retirement plan, which means all assets are deemed ordinary income. And if the beneficiary is under age 59½, it’s considered an “early withdrawal,” subject to a 10% excise tax penalty. Schedule K-1s are complex, and UBI reporting can be confusing especially if the retirement plan receives several Schedule K-1s from different investments. Don’t look to brokers for help; most have passed off this problem to retirement plan trustees and beneficial owners (and that is you!).

In our July 2013 blog and Webinar “The DOs and DON’Ts of using IRAs and other retirement plans in trading activities and alternative investments,” we cautioned investors on making alternative investments in their retirement plan accounts. We talked about UBIT, self-dealing and prohibited transactions. We explained that U.S. pension funds invest in offshore hedge funds organized as corporations since the offshore corporations are “UBIT blockers.”

If your retirement plan is invested in a publicly traded partnership, assess your tax situation immediately, catch up with Form 990-T filing compliance and consider selling those investments. It’s better to buy them in a taxable account.

Unrelated Business Income Defined by the IRS site.

“For most organizations, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements:

  1. It is a trade or business,
  2. It is not substantially related to furthering the exempt purpose of the organization.

There are, however, a number of modifications, exclusions, and exceptions to the general definition of unrelated business income.”

Darren Neuschwander CPA and Star Johnson CPA contributed to this article. 

 



Estates Should Consider A “Portability Election”

October 7, 2014 | By: Robert A. Green, CPA

When an estate is under the estate tax return filing threshold ($5 million for 2011, $5.12 million for 2012, and $5.25 million for 2013), trustees should still consider filing a Form 706 estate tax return. Trustees can make a “portability election” allowing the surviving spouse to use the decedent spouse’s unused exclusion amount. The IRS allows late elections for estates created after 2011 and before 2014; the due date is Dec. 31, 2014. After that date, it’s too late. See Rev. Proc. 2014-18.


Cost-Basis Reporting Problems and Solutions

November 20, 2012 | By: Robert A. Green, CPA

If you trade or invest in securities, you need to learn about “cost-basis reporting,” a new set of IRS rules for taxpayers starting with 2011 tax filings. Previously, taxpayers could simply enter their capital gains and losses (proceeds, cost basis and holding period) onto Schedule D of their individual income tax return. That’s no longer allowed, so 2011 and 2012 tax returns are proving to be a challenge.

Under the new cost-basis reporting regime, taxpayers must decipher broker-provided Form 1099-Bs. In tax years prior to 2011, taxpayers and their accountants could easily use a Form 1099-B to enter proceeds from each securities sale on their Schedule Ds. Taxpayers then entered their own record of cost-basis information and they were finished. Investors often looked up the original purchase price in an earlier brokerage statement and considered stock splits or other corporate actions, which are rare. Active traders generally used software like TradeLog, which downloaded all trade executions and provided an easy-to-use Schedule D-1 attachment.

You would think that when brokers entered the picture providing cost-basis information to taxpayers and the IRS on Form 1099-Bs, taxpayer compliance would be easier. You would be very wrong! (I explain this problem in an interview for MoneyShow.com: “Tax Flubs That Can Cost You Thousands“.)

Take one look at your 2011 Form 1099-B and you will see the problem. While stock proceeds may look the same as prior years, the new cost-basis information is extremely confusing. Some brokers mark cost information with quirky new codes like P (provided to the IRS), N (not provided to the IRS) and W (wash sales). Some brokers do not provide totals for the amounts they are reporting. Plus there are covered securities, non-covered securities and other. All individual trades must be entered on the new 2011 tax form 8949, which includes Parts A (proceeds and cost basis both reported to the IRS), B (proceeds reported to the IRS but not cost basis) and C (other or not reported on a 1099). Separate Form 8949s must be filed for short term and long term. Add it up: That’s up to six different categories on the Form 8949s instead of the single Schedule D required in the past. This is a huge burden and is very confusing for taxpayers.

That’s just a fraction of the problem. Many brokers are using back-office accounting solutions that may botch wash-sale reporting, since they have not focused on it much in prior years, and some are omitting 2010 wash sale cost basis deferred into 2011. Also, most brokers rushed 1099-Bs to the printer before doing an end-of-January wash-sale calculation. In addition, the rules brokers are required to follow for 1099-B reporting are different from the rules for taxpayers: Most brokers report wash sales between “identical positions” (the same symbol only), whereas taxpayers are required to report wash sales between “substantially identical positions” (such as between stocks and options). How can the IRS ask brokers and taxpayers to report wash sales differently? Even if brokers get everything right, broker-provided wash sales would still be wrong because they only report wash sales in one account, whereas a taxpayer must report them across all taxable accounts, including IRAs.(For more details, see our March 20 blog.)

Using a 1099-B for wash sale reporting is a big mistake. IRS cost-basis reporting rules state that taxpayers should not rely on 1099-Bs for tax reporting purposes. What? (Read more about this concept on our Aug 16 12 blog - Why do forex forward dealers issue 1099s, yet retail spot forex brokers do not?) 

Phasing in the rules seems to be part of the problem. While the IRS phased in the new rules for brokers, it did not do so for taxpayers. The IRS is giving taxpayers the difficult job of deciphering all the inevitable discrepancies between 1099-Bs and Form 8949 results.

What should you do?
We suggest reading our blogs on this saga to understand the new IRS rules, how 1099-Bs are constructed and how you should handle Form 8949. We recommend using software like TradeLog and filing an extension.

For the 2011 tax-filing season — which ended on the extension deadline of Oct. 15, 2012 — IRS relief never came, and most brokers were not able to sufficiently correct their 1099-Bs. We filed 2011 tax returns as explained in our blogs below, and attached a suggested footnote explanation.

  • Aug 29 12 An update note to tax preparers and traders about incorrect 1099-Bs and 2011 tax filings
  • Aug 17 12 Tax Return Footnote: 2011 Form 8949 and Cost-Basis Reporting Rules
  • Jul 11 12 Cost-Basis Reporting Update: How To File Form 8949 With 1099-B Differences

Ways to avoid Form 8949
Business traders qualifying for trader tax status are entitled to elect Section 475 mark-to-market(MTM) accounting on a timely basis (by April 15, 2013 for the 2013 tax year). Section 475 business trades are reported on Form 4797 Part II (ordinary gain or loss) and not on Form 8949. Although Section 475 extricates traders from the compliance headaches of Form 8949, it does not change their preferred solution. Either way, traders should use TradeLog software to download their trades and calculate their required trade-by-trade gain or loss. Another way out of Form 8949 is to use an entity, which we recommend for business traders to reduce red flags on trader tax status. The IRS does notcurrently use Form 8949 on entity tax returns.

We recommend a Section 475 MTM election for business trading in securities only. We don’t recommend Section 475 MTM for Section 1256 contracts – which you are permitted to exclude from the Section 475 MTM election – so traders don’t lose lower 60/40 tax rates (currently up to 12% less). Don’t worry, Section 475 MTM is not permissible on segregated investments, so traders can enjoy tax deferral at year-end, and also hold for 12 months to generate lower long-term capital gains rates (currently up to 15%). Section 475 MTM reports both realized and unrealized gains and losses at year-end.

Be prepared for similar problems for 2012 returns
More cost-basis reporting items will be phased in for 2012 returns. Per Fidelity’s “Frequently asked questions about cost basis”: “On January 1, 2012, the second phase of the cost basis tax reporting requirements goes into effect. This next phase impacts reporting of securities eligible for average cost including mutual funds, exchange-traded funds (ETFs) classified as registered investment companies, and dividend reinvestment plans (DRIPs).” We are working on mutual fund bifurcation tax issues, and we plan to publish a separate blog on that subject soon.

We expect some brokers to compound wash sale loss problems from 2011 into 2012. If brokers only report potential wash sales in 2011 and 2012, they may not connect the years and related wash sale loss reporting problems, although that reporting is basically useless to taxpayers. Conversely, if brokers report overstated 2011 wash sales as part of 2012 cost basis, it will lead to overstating cost-basis in 2012, which then will lead to understating taxable income. We won’t know if this will happen until our CPAs start seeing 2012 Form 1099-Bs. Stay tuned. 


Tax Treatment for Swaps, Options On Swaps, Futures Swaps, And Options On ETFs Partially Consisting Of Swaps

September 12, 2012 | By: Robert A. Green, CPA

A growing trend for traders is to get involved with swap transactions. In general, tax treatment for swaps is ordinary gain or loss, but some financial instruments partially including swaps may qualify for lower 60/40 tax rates in Section 1256. The CME Group just announced new futures swaps that should fall in this category.

What exactly is a swap? According to Investopedia “A swap is an agreement between two parties to exchange sequences of cash flows for a set period of time.” Classic swaps involve bonds and/or currencies, swapping interest rate and currency cash flows. For example, a global business often uses swap transactions to cushion risk exposure outside their main business activities. Derivatives are meant to smooth balance sheets, but in 2008 they contributed to the banking and markets crisis.

Hedge funds often take one side of a swap transaction with corporations and banks. Retail traders rarely have that type of access to the swaps marketplace. But, they’re gaining exposure to a bevy of new exchange-traded derivative products, including options on swaps, and ETFs consisting partially of swaps. All of these choices are great, buy they muddy the waters on tax treatment.

As we pointed out in our blog about the Dodd-Frank Financial Regulation bill enacted in July 2010, Congress reined in the privately traded swaps marketplace requiring certain derivative transactions to be cleared on futures exchanges, with posting of collateral and compliance oversight. Congress and the IRS specifically addressed taxation, stating that although swaps would be cleared on futures exchanges, they still had ordinary gain or loss treatment, not lower Section 1256 60/40 tax rates as many hoped the rule change meant.

Back in March 2011, our blog covered ETF tax and regulatory issues, including tax treatment for options on ETFs. Since then a few clients have asked us about these instruments, where swaps are a minor or major component of the underlying ETF. We make a case for treating options on broad-based ETFs as Section 1256 contracts. What happens if that underlying ETF contains a material amount of swap transactions? Does that taint the option from using the more tax-beneficial Section 1256 treatment?

Swaps 
In 2010, Section 1256 was amended to exclude “any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement.” We have received questions from clients as whether all swaps (for example, real estate index swaps) are excluded from Section 1256 because of the words “or similar agreement.”
There is nothing definitive on this issue. However, in its preamble to proposed regulations dealing with Section 1256, the IRS writes:

Congress incorporated into section 1256(b)(2)(B) a list of swaps that parallels the list of swaps included under the definition of a notional principal contract in §1.446-3(c) with the addition of credit default swaps. The parallel language suggests that Congress was attempting to harmonize the category of swaps excluded under section 1256(b)(2)(B) with swaps that qualify as notional principal contracts under §1.446-3(c), rather than with the contracts defined as “swaps” under section 721 of the Dodd-Frank Act. Accordingly, § 1.1256(b)-1(a) of the proposed regulations provides that a section 1256 contract does not include a contract that qualifies as a notional principal contract as defined in proposed §1.446-3(c).

Basically, if the IRS is correct, then a real estate index swap should be excluded from 1256 treatment because it’s considered a notional principal contract under Regulation §1.446-3(c). We believe the IRS view is a correct interpretation of the statute and should be followed.

Options on Swaps
In the Preamble, the IRS also takes the position that an option on a notional principal contract doesn’t qualify for 1256 treatment. This view is harder to fit into the language of Section 1256, though the IRS reasoning is sound.

Proposed regulations are not binding until they are made final. Nevertheless, they are statements of current IRS thinking, so taxpayers taking a contrary position could be challenged by the IRS. We strongly recommend following the IRS by excluding all “notional principal contracts” (such as real estate index swaps) from Section 1256. We also recommend following the IRS proposal with regard to options on swaps, even though it’s not clear whether Section 1256 requires this conclusion.

Options on ETFs Consisting of Swaps and other Securities:
Often, ETFs consist of both swaps and other securities. See, for example, http://www.proshares.com/funds/uyg_daily_holdings.html?show=all. What is the tax treatment of such ETFs? As discussed in our March blog, income generated while holding the ETFs passes through to the holders. If, for example, 25% of the ETF’s income passed-though on a Schedule K-1 is generated by Section 1256 contracts, then 25% of the income will be subject to Section 1256. If the ETF is treated as a partnership, then the gain on the sale of the ETF will not get Section 1256 treatment because the ETF itself is still a security.

What happens if you purchase an option on such an ETF? Is it treated as an option on a broad-based securities index with Section 1256 treatment, or does the presence of swaps mean it fails to qualify for Section 1256 treatment? In our March blog, we made the case for treating options on broad-based securities ETFs as Section 1256 contracts. But when swap contracts are a significant component of the underlying ETF, the answer is unclear.

Given the fact that options on swaps are not clearly covered by Section 1256, and are discussed only in proposed regulations that are non-binding, there might be an opening to be lenient where the swaps constitute a minority of the ETF. This is an area where a tax opinion from our tax attorney would be a good idea to avoid penalties if you’re later challenged by the IRS.

Futures Swaps
According to Reuters, CME Group Inc. “is planning to offer a new suite of futures tied to interest rate swaps later this year, as the giant exchange operator seeks to take advantage of a regulatory push for more of the $400 trillion over-the-counter swaps market to move into clearinghouses and onto regulated trading platforms.”

This begs the following tax question: Will these futures swap contracts be taxed as regulated futures contracts (RFCs) traded on U.S. futures exchanges, which are listed in Section 1256, or will they be subject to ordinary gain or loss treatment like swap contracts in general?

According to our research, futures swaps probably have Section 1256 treatment:

  • Proposed Regs 1.1256-1(a) state: “A section 1256 contract does not include any contract, or option on such contract, that is a notional principal contract as defined in §1.446-3(c). A contract that is defined as both a notional principal contract in §1.446-3(c) and as a section 1256 contract in section 1256(b)(1) is treated as a notional principal contract and not as a section 1256 contract.” (A swap is considered a notional principal contract.)
  • The preamble to those regs states: “Section 1256(b)(2)(B) raises questions as to whether an option on a notional principal contract that is traded on a qualified board or exchange would constitute a ‘similar agreement’ or would instead be treated as a nonequity option under section 1256(g)(3). Since an option on a notional principal contract is closely connected with the underlying contract, the Treasury Department and the IRS believe that such an option should be treated as a similar agreement within the meaning of section 1256(b)(2)(B). Accordingly, §1.1256(b)-1(a) of the proposed regulations also provides that a section 1256 contract does not include an option on any contract that is a notional principal contract defined in §1.446-3(c) of the proposed regulations.”
  • This seems limited to options. It is not clear whether the same reasoning would apply to futures, but so long as the Treasury doesn’t explicitly include futures, we feel we’re safe in not including futures.

Where to report swap transactions
In general, swaps are ordinary gain or loss treatment reported on line 21 “Other Income” of Form 1040 like the default treatment for forex in Section 988. Similarly like forex, you can report swaps in summary form on realized gains and losses only. Unlike with forex, you cannot file an opt-out election to treat swaps as capital gains or losses. If you have trader tax status (business treatment), you can use Form 4797 Part II (ordinary gain or loss) instead of line 21 of Form 1040.If treated like other RFCs, futures swaps are reported on Form 6781 Part I (Section 1256 contracts). These flow to Schedule D with 60/40 treatment. If you have a large capital loss carryover to use up, you can apply it against capital gains only, which includes futures swaps but not regular swaps treated with ordinary income.

Bottom line
If you hear the term “swap” in any of the instruments you trade, be on the lookout for ordinary gain or loss treatment. Remember, even if it clears on a futures exchange, it’s not allowed to have Section 1256 treatment, unless it’s a new “futures swap.” A few options on ETFs with swap components may have 1256 treatment, too.

In general, if you want Section 1256 treatment, it’s best to read our content and check with our tax attorney. One recent client had over $2 million in trading gains on options on ETFs. He wanted to use Section 1256 treatment on many of these ETF options and it was a challenge. Some involved swaps, too. Our tax opinion letter helped him a lot.

Mark Feldman JD contributed to this blog post. 





The Value Of A Good CPA Firm

December 20, 2010 | By: Robert A. Green, CPA

This tax season, consider using a CPA firm, knowledgeable in trader tax. A tax storefront doesn’t know trader tax, and other firms on the trader tax circuit may not always be CPAs and may act contrary to the professional and ethical standards applicable to CPAs. Commercial providers promising tax relief on TV may not always deliver what they promise. Don’t fall for deceptive marketing statements and listen to slanderous statements about good providers. 

CPAs are bound by a code of ethics. They can’t make improper marketing statements; they must disclose commissions and other relationships to their clients. There are others on the trader tax circuit who are not CPA firms and who make outlandish, untrue statements. They pay universities and schools commissions for services from their clients without disclosing it. If you’re a trader, you need the right advice from a trusted provider so you can be sure you’re not going to leave any money on the table this tax season or get into trouble with the IRS. 

If you find a CPA who knows trader tax, make sure he or she is dedicated to trader tax services rather than trading for his or her own account and preparing tax returns as a side business. It’s a disadvantage to engage a CPA sole practitioner more focused on day trading than your tax needs. If you have trouble reaching these CPAs during trading market hours, you might be dealing with a part-time CPA, so think twice about entrusting your taxes with this person. Just because they understand how to day trade doesn’t necessarily mean they’re a better trader tax preparer — it just means they have more distractions. 

Another important advantage of using an established, trader tax CPA firm like ours is that all of our tax returns are reviewed by another CPA to give you the best possible advantages. A CPA sole practitioner’s work is rarely reviewed by another CPA, so you’re dependent on their expertise alone. 

You deserve better customer service and more accurate tax preparation and planning results than you can get from either of the scenarios above.

Dangers of non-CPA firms
For example, some non-CPA firms promise education deductions 18 months before the start of business — which is improper. They promise business deductions when you don’t have trader tax status. They say you can’t use trader tax status after the fact as an individual — that’s wrong. Their non-CPA salesmen make wild statements about the law and what they can do for you. They might have one or more CPAs on their roster, but the owners of the firm and salesmen are not CPAs and are not bound by a code of ethics. You’re comparing apples to oranges when you compare those types of providers to a good CPA firm qualified in trader tax. One firm respects a CPA code of ethics, which is a good thing. And the others can make wild statements, so you need to choose accordingly. 

Again, these storefront providers don’t know trader tax, and rarely work with a CPA. Software can be good, but it doesn’t have guidance on trader tax — software has trouble with forex, futures, short sales, and more. We do offer tax guides for people who prefer self-preparation, and our trader tax prep service we believe is the best around. We have competent, highly trained CPAs on our roster and ownership, and we’ve been leading the industry in trader tax content, knowledge and track record. We don’t engage salesmen, and we don’t sell you stuff you don’t need. When we say we have had very few trader tax exams, you can count on that statement. When another firm says it has had zero exams and lies about our record, don’t believe it. Choose right, because it’s not just tax savings at stake — there could be tax trouble ahead. You don’t want to go into an exam with incorrect law applied and face potentially large problems with the IRS. That’s the value of a good CPA firm. If you go to a doctor, you go to one that has a license. If you need a lawyer, you seek one with the proper license. If you need an accountant for your important taxes, we think you should find one with a valued CPA license. Here’s more info about the AICPA Code of Professional Conduct. 

When comparing to the storefront, also consider that many local CPA firms are experts in other areas; the great majority aren’t familiar with online traders, the various elections, nuances and strategies that we focus on as our main area of expertise. We’re a virtual firm. No matter where you are in the country, you can easily work with us. Why not choose our service over a local CPA firm that doesn’t have the knowledge and experience you need for trader tax?

Think smart this tax season. 


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