Tag Archives: compliance

2013 Tax Filings For Traders & 2014 Tax Planning

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

Green shows Lightspeed traders how to claim and benefit from trader tax status on 2013 tax filings, and how to make changes in 2014 that will save even more money.

Sponsored and hosted by Lightspeed Trading

Join noted trader tax expert Robert A. Green, CPA Managing Member of Green NFH, LLC a leading tax compliance firm for traders and investors.

  • How traders should prepare 2013 tax returns differently from investors
  • Business expenses versus investment expenses
  • Trading gains and losses are reported on other tax forms
  • Forex, securities, futures and options are taxed differently
  • Try to get lower 60/40 tax rates in Section 125
  • When to use summary reporting versus line-by-line reporting for each trade
  • Special accounting issues for securities traders, including using Tradelog software to generate Form 8949 with proper cost basis reporting and accounting for wash sales across all accounts
  • Business traders can form entities to deduct health insurance and retirement plan contributions
  • 2014 tax planning

Tax Filing Mistakes You Can Avoid

| By: Robert A. Green, CPA

We cover avoidable tax-time mistakes, including not using trader tax status (business treatment), which you can claim after the fact; not using the correct tax treatment for what you trade, like ordinary loss treatment where allowed; and several problems with cost-basis reporting for securities.

Tax Forms And Compliance

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

The IRS hasn’t created specialized tax forms for individual trading businesses. Traders enter gains and losses, portfolio income, and business expenses on various forms. It’s often confusing. Which form should be used if the taxpayer is a forex trader? Which form is correct for securities traders using the Section 475 MTM method? Can one report trading gains directly on a Schedule C? The different reporting strategies for the various types of traders make tax time not so cut-and-dry.

Sole proprietor trading business

Other sole-proprietorship businesses report revenue, cost of goods sold, and expenses on Schedule C. But business traders qualifying for trader tax status (TTS) report only trading business expenses on Schedule C. Trading gains and losses are reported on various forms, depending on the situation. In an entity, all trading gains, losses, and business expenses are consolidated on the entity tax return — a partnership Form 1065 or S-Corp Form 1120-S. That’s one reason why we recommend entities for TTS traders.

Sales of securities must be first reported on Form 8949, which then feeds into Schedule D (cash method) with capital losses limited to $3,000 per year against ordinary income (the rest is a capital loss carryover). Capital losses are unlimited against capital gains. (We cover Form 8949 in Chapter 4.)

Business traders who elect and use Section 475 MTM on securities report their business trades (line by line) on Form 4797 Part II. MTM means open business trades are marked-to-market at year-end based on year-end prices. Business traders still report sales of segregated investments in securities (without MTM) on Form 8949. Form 4797 Part II (ordinary gain or loss) has business ordinary loss treatment and avoids the capital loss limitation and wash-sale loss treatment. Form 4797 losses are counted in net operating loss (NOL) calculations.

Section 1256 contract traders (i.e., futures) should use Form 6781 (unless they elected Section 475 for commodities/futures; in that case, Form 4797 is used). Section 1256 traders don’t use Form 8949 — they rely on a one-page Form 1099-B showing their net trading gain or loss (“aggregate profit or loss on contracts”). Simply enter that amount in summary form on Form 6781 Part I.

If the trader has a large Section 1256 loss, he should consider carrying back those losses three tax years, but only applied against Section 1256 gains in those years. To obtain this election, check box D labeled “Net section 1256 contracts loss election” on the top of Form 6781.

Forex traders with Section 988 ordinary gains or losses who don’t qualify for TTS should use line 8 (other income or loss) on 2020 Schedule 1 (Form 1040). TTS traders should use 2020 Form 4797, Part II ordinary gain or loss. What’s the difference? Form 4797 Part II losses contribute to NOL carryforwards against any type of income, whereas Form 1040’s “other losses” do not. The latter can be wasted if the taxpayer has negative income. In that case, a contemporaneous capital gains election is better on the Section 988 trades. If the taxpayer filed the contemporaneous Section 988 opt-out (capital gains) election, she should use Form 8949 for minor currencies and Form 6781 for major currencies. Forex uses summary reporting. (We cover forex tax treatment in Chapter 3 and forex accounting treatment in Chapter 4.)

For more information, see Green’s Trader Tax Guide. See Chapter 6 on Trader Tax Return Reporting Strategies.

Tax Compliance (Preparation/Planning)

August 10, 2014 | By: jparasole

Update May 31, 2022: GNM is not bringing on new tax compliance clients for 2021 tax return preparation. We plan to evaluate new clients for 2022 tax returns after completing 2021 tax returns due October 15, 2022.

With filing your 2021 individual tax return, GNM has partnered with Protection Plus to provide all our personal tax clients with complete access to their services. Click here for more information. 

Here’s an example of one of our tax compliance services:

Individual Tax Compliance (First-Year Traders) – Partial Payment & Minimum Price

GNM’s tax compliance service includes

  • Plan and prepare your individual federal and state tax returns, including your spouse, on a married-filing-joint tax return.
  • Assessment of trader tax status (TTS): If you qualify for TTS for any part of the year, we can add a Schedule C to deduct your trading business expenses, startup costs, and home-office expenses above the line from gross income. TTS does not require an election, whereas Section 475 MTM does.
  • In a tax return footnote, we explain trader tax law, how you qualify for TTS, tax elections like Sections 475 MTM, the tax treatment on financial products, and more. Avoiding IRS questions is vital.
  • If you traded securities, there is complicated accounting for wash sale loss adjustments or Section 475 MTM accounting, including a Section 481(a) adjustment for the first year of the election. Consider our trade accounting service in conjunction with our tax compliance service.
  • A timely-filed Section 475 MTM election statement and Form 3115 (Change of Accounting Method) perfect the Section 475 election.
  • Tax treatment for traders can be confusing, and we get it right, taking advantage of losses where possible and Section 1256 60/40 capital gains rates. Traders can depart from broker 1099-Bs where entitled, and we explain it in the tax return footnotes.
  • The home-office deduction is one of the most significant deductions for traders, and a trader needs to make special moves on the tax return to unlock the full deduction.
  • The 20% deduction on qualified business income: QBI includes 475 income net of TTS expenses; it excludes capital gains.
  • If you have a pass-through trading entity, we maximize tax benefits between the individual and entity tax returns, including unreimbursed partnership expenses (UPE) and accountable plan reimbursements with S-Corps. We also focus on employee benefits, including health insurance and retirement plans with S-Corps. 
  • Twenty states have enacted SALT cap workaround strategies using partnerships and S-Corps.
  • Proprietary traders: If your prop trading firm issued a Form 1099-Misc for Non-Employee Compensation, we add a Schedule C to report that revenue and deduct trading expenses, including a home office, to reduce net income, income tax, and self-employment taxes. You can maximize a retirement plan and health insurance deduction with self-employment income. If your prop trading firm issued a Schedule K-1, we would focus on deducting trading expenses as UPE on Schedule E.

After purchase, GNM’s administration team will follow up with you by email to commence the tax compliance process. See how our virtual communication process works efficiently.

Our partial payment is also a minimum price. Kindly expect a balance due to our fees when we complete the tax compliance engagement. Please read Price & Billing Policies for more information.

If you have any questions, don’t hesitate to contact us.

Thank you for trusting our firm GNM to help you. 

Sincerely,
Darren L. Neuschwander, CPA
Adam W. Manning, CPA
Members, Green, Neuschwander & Manning, LLC

Common trader tax mistakes

August 18, 2013 | By: Robert A. Green, CPA

Trader tax laws and benefits are complex and nuanced. Far too many traders and tax preparers don’t know the laws or misapply them on tax returns. Why pay tens of thousands of tax dollars more than you should?

It’s wise to educate yourself before risking your capital and it’s wise to do the same before planning and filing tax returns. To help with the latter, I’ve assembled a list of the most common mistakes made by traders and tax preparers.

Big picture items

1. Not claiming trader tax status, business expense treatment. (Or claiming this status when not entitled to it.) Business traders can save an average of $5,000 or more using business expense treatment. Business expenses are 100% deductible from gross income, whereas investment expenses are considered miscellaneous itemized deductions and are only deductible “below the line” in excess of 2% of adjusted gross income (AGI) and added back for the Alternative Minimum Tax (AMT), also known as the nasty second tax regime. Business expenses allow home-office deductions, education expenses, and startup costs, whereas investment expenses do not. Also, traders may claim trader tax status after the fact, including on amended tax return filings for the past three open tax years.

2. Not filing the Section 475 MTM ordinary loss election on securities and getting stuck with the puny $3,000 capital loss limitation, wash sale loss headaches, and extra tax costs. Many traders and accountants mishandle the Section 475 election statement (due by April 15 of the current tax year for existing individuals and partnerships) or they botch perfecting the election on a Form 3115 filing. One mix up can jeopardize ordinary gain or loss treatment. The biggest pitfall for traders is not deducting trading losses when they otherwise could. Section 475 does not apply to segregated investments or Section 1256 contracts when elected on securities only.

Unfortunately, you can’t fix a missed or botched Section 475 election; you need to focus on climbing out of the capital loss carryover hole you dug. You can form a new entity and use the “new taxpayer” exception allowing an internal Section 475 election within 75 days of inception.

3. Making the wrong decision about the forex Section 988 opt-out election and reporting forex incorrectly. Spot and forward forex receives Section 988 ordinary gain or loss treatment (which generally is better than a capital loss limitation). At any time during the tax year, traders are entitled to file an internal “contemporaneous” opt-out election to have capital gains treatment instead. That’s helpful if you have capital loss carryovers. If you trade in major forex currencies and don’t “take or make delivery” of the underlying currency, the opt-out election subjects forex forwards — and we make a case for spot forex too — to the lower Section 1256(g) 60/40 tax rates. That reduces the highest tax rates by 12%!

Forex reporting depends on whether you file the Section 988 opt-out election and whether you qualify for trader tax status. Section 988 without trader tax status is line 21 of Form 1040, and with that status its Form 4797 Part II. Section 988 losses over $50,000 require “tax shelter” Form 8886. Many IRS agents are confused over tax treatment for spot forex, plus forex brokers aren’t supposed to issue 1099-Bs for spot forex. Make sure to read brokers’ tax reports correctly. For example, rollover interest is part of trading gain or loss. If you opt-out of Section 988 and choose Section 1256(g), use mark-to-market at year-end on Form 6781. Thankfully, summary reporting applies on forex.

4. Not forming a trading entity to unlock AGI deductions for retirement plans and health insurance premiums. These AGI deductions can save $2,000 to $17,000 or more in taxes, but sole proprietor retail traders can’t get them in connection with trading gains. By forming a simple pass-through entity like a partnership, LLC, or S-Corp, business traders can take advantage of these deductions.

Tax reporting errors and compliance headaches

5. Reporting trading gains and losses on Schedule C, almost guaranteeing an IRS notice or exam. Items must be reported in the correct place. While business expenses are reported on Schedule C, trading gains and losses are reported on other tax forms like 8949, 6781, and 4797.

6. Using our transfer-of-income strategy incorrectly, or not using it at all. The transfer is executed differently for sole proprietors vs. entities. You need this transfer to unlock the home-office deduction, Section 179 depreciation, and AGI deductions, and to reduce the IRS red flag factors on Schedule C and entities.

7. Using the wrong solution for securities trade accounting and calculating gains and losses incorrectly, especially wash sales. Many traders and preparers botch IRS cost-basis reporting on Form 8949 and the reconciliation with Form 1099-B. Some traders fail to report non-1099-B items like stock options on Form 8949. We recommend TradeLog software to handle this after downloading actual trades, rather than inputting 1099-B information.

8. Botching tax treatment between securities, Section 1256 contracts, forex, ETFs, options, precious metals, foreign futures, and more.

9. Misreporting Section 1256 contracts such as securities on Form 8949 rather than on Form 6781, thereby losing lower 60/40 treatment. Not all brokers report Section 1256 contracts correctly, especially instruments that aren’t clearly designated as such including some E-mini indexes and options on those indexes.

10. Misreporting ETFs and ETF options and not adding Schedule K-1 pass-through income to cost basis. ETFs and ETF options are generally taxed as securities, and commodity ETFs often pass through Section 1256 income or loss on a K-1. Options on commodity ETFs can be considered Section 1256 contracts. It’s a pain to deal with numerous ETF K-1s at tax time.

11. Not filing a 1099-Misc for fees paid to service providers, including you for administration. Sole proprietors or entities paying service providers $600 or more by check or cash must issue a Form 1099-Misc. It’s better to file a 1099-Misc. late subject to a penalty of $50 rather than encourage the IRS to catch you and assess much higher penalties.

12. Misreporting education expenses. Pre-business education expenses — including seminars, trade shows, and travel — are generally not allowed as investment expenses. Education is allowed as a business expense but only if incurred after qualifying for trader tax status. Try to squeeze a reasonable amount of pre-business education into Section 195 startup costs to expense once you achieve trader tax status. Don’t fall prey to those promising better results using dual entity schemes including a C-Corp.

13. Not filing a tax return due to negative income and trading losses. Expect a “jeopardy” (made up) tax assessment notice from the IRS. If you trade securities, the IRS doesn’t see the full picture, even with new cost-basis reporting. The IRS may think you made a lot of money and will hit you with a huge tax bill. Not filing can cause you to lose capital loss carryovers for previous years. With 1099s filed by brokers, there is no place to hide.

14. Mishandling tax notices and IRS exams. Generally, IRS and state agents don’t understand a trading business. It’s not a passive loss activity or hobby loss activity, and various items are reported in different areas with complex and nuanced tax treatment and elections. State tax rules for entities usually make exceptions for trading businesses, but that is not always apparent. Before a tax exam gets out of control, consult with a trader tax expert to get it on the right path.

15. Being non-compliant on FBAR and other foreign tax reporting such as Form 8938 (foreign financial assets). Congress and the IRS are very concerned about tax cheats using offshore bank accounts, structures, and schemes. Not filing foreign bank account reports (FBAR) on time or correctly can be costly: Back taxes, penalties, interest, and even criminal proceedings could be the result. Consider the IRS’s Offshore Voluntary Disclosure Initiative (OVDI). (Note that this program is NOT amnesty; in some cases, it’s a mistake to enter OVDI when there’s a better way to come clean.) Generally, opening offshore entities doesn’t help reduce taxes as they are treated as disregarded entities or they are subject to passive foreign investment company rules. Avoiding the Commodity Futures Trading Commission’s rules for retail forex trading by using offshore accounts or entities doesn’t work.

Entities and retirement plans

16. Forming the wrong type of entity, and in the wrong state. If you live, work, and trade in your home state and want to form a pass-through entity, it’s best to form it there. Don’t fall prey to promoters in Nevada harping on the benefits of corporations formed in Nevada. If you don’t register that Nevada entity in your home state, you won’t have asset protection in your home state. A Nevada LLC filing as a partnership passes through its income to your home state.

17. Tapping into IRA and other retirement funds incorrectly, causing IRS penalties and trouble. Don’t get busted by the IRS for misusing your retirement funds. See our blog dated Jul. 24, 2013 “Learn the DOs and DON’Ts of using IRAs and other retirement plans in trading activities and alternative investments” for more on this topic.

18. Triggering wash sale losses in IRAs which are permanently lost. Far too many traders make this tragic mistake. When you buy back a “substantially identical” security position in any of your IRAs 30 days before or after selling it for a loss in any of your taxable accounts, you can kiss that tax loss goodbye forever. It applies across husband and wife individual and joint accounts. Normally, wash sales are only a deferral problem, but in this case it’s a permanent problem. Abstain from trading substantially identical positions in your IRA accounts or house your active trading in an entity, which is a different taxpayer for purposes of the wash sale rules. A Section 475 election also solves this problem.

19. Choosing the wrong type of retirement plan. The Individual 401(k) plan for business traders is best. It combines a 100% deductible 401(k) elective deferral — where the biggest tax savings lies — with a 20% deductible profit-sharing plan. Don’t forget to open this plan before year-end, even with no money contributed.

20. Paying self-employment (SE) taxes on trading gains. Only full members of futures exchanges owe SE taxes on futures trading gains. Too many traders pay SE taxes on these gains and the IRS doesn’t challenge it. Watch out for the new ObamaCare 3.8% Medicare surtax on unearned income starting in 2013.

Bottom line
Common mistakes cost traders tens of thousands of dollars per year on their tax returns. Don’t be penny wise and pound foolish. Spend a few dollars to buy premium trader tax guides to learn how to avoid these mistakes. Consider engaging a trader tax expert to help with your tax return elections, planning, and preparation. Use the right trade accounting software for securities. Some mistakes you can fix on tax returns on extension or on amended tax return filings. Other mistakes can’t be fixed, and you should focus on tax strategies to dig out of that hole.

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.