Entity Tax-Advantaged Solutions For Traders
May 06, 2015 at 4:15 pm EST
Forming an entity can save traders significant taxes and simplify tax filings. Join Green NFH CPA and entity tax expert Robert A. Green CPA as he explains the following:
- Wash sales: By trading in an entity, security traders can reduce Section 1091 wash sale losses with individual investments and IRAs since the entity has a separate taxpayer ID. Keep an eye out for Section 267 related party transaction rules.
- Section 475 MTM: A new entity can elect Section 475 MTM within 75 days of inception and it can revoke the election in a subsequent tax year if that’s helpful.
- Employee-benefit plans: Those who qualify for “trader tax status”(business treatment) are better off trading in an entity vs. individual accounts as a Schedule C sole proprietor. The entity looks much better to the IRS and it also unlocks additional tax savings from employee-benefit deductions (health insurance and retirement plans). Learn how to maximize employee-benefit deductions.
- Best entities: Learn the best choice of entity for different situations. An S-Corp is best for maximizing employee-benefit deductions; otherwise, a partnership tax return works well. A C-Corp is inappropriate as a trading vehicle, but okay as a management company. In some cases, having a trading company and a management company is helpful.
- Costs: Learn about the low costs for forming and operating a trading entity. Tax savings is far greater than cost.
- Timing: Mid-year is an excellent time to form a trading entity. It breaks the chain on wash sales in your individual taxable accounts and there’s plenty of time to maximize employee-benefit plan deductions for the entire year.
For 25+ years prior to 2013 I used TurboTax to do my own tax returns. When I started trading options as my primary source of income, however, I attended a presentation by Bob Green at Traders Expo and realized that there were significant advantages to trading within an LLC/partnership legal entity. I also realized that this made my tax return situation more complicated, so I started with GreenNFH for the tax year 2013 since they specialize in tax returns for active traders. Since I live in California, all my interacting with the staff has been through email, and the easy-to-use secure file upload/download facility they use. I have found the entire process to be very efficient and the fees to be quite reasonable. I recommend GreenNFH to other traders whenever the topics of trading entities and tax returns come up.