Tag Archives: tax compliance

Last-Minute Tax Tips For Traders

March 19, 2019 | By: Robert A. Green, CPA

Many traders are filing 2018 tax returns, extensions, and Section 475 elections close to the deadline of April 15, 2019. Join Robert A. Green, CPA of GreenTraderTax.com to discuss several good reasons to file an extension, and his blog post “Tax Extensions: 12 Tips To Save You Money.” Mr. Green will set aside 15 to 30 minutes dedicated to answering questions, so come prepared.

Webinar hosted and recording produced by Interactive Brokers. Everyone is welcome; you don’t have to be a client of IB.

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How to Qualify for Trader Tax Status and Save

March 15, 2019 | By: Robert A. Green, CPA

Register same day

On March 19, join Robert A. Green, CPA, of GreenTraderTax as he breaks down the advantages of filing with trader tax status (TTS). Among other benefits,

  • TTS traders may use business expense treatment on 2018 and 2019 tax returns. Learn how to qualify for TTS.
  • Learn how TTS traders use an S-Corp to unlock employee benefit deductions for health insurance and retirement plans.
  • TTS securities traders should consider a 2019 Section 475 election by April 15, 2019, for tax loss insurance: Exemption from capital loss limitations, and wash sale loss adjustments.
  • The qualified business income (QBI) deduction might apply to traders with 475 income, but it’s uncertain at this time.

Webinar hosted and recording produced by TradeStation. Everyone is welcome; you don’t have to be a client of TS.

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Get a 100% rebate from TS on your GNMTraderTax purchase.

Tax Extensions: 12 Tips To Save You Money

March 12, 2019 | By: Robert A. Green, CPA | Read it on

Individual tax returns for 2018 are due April 15, 2019, however, most active traders aren’t ready to file on time. Some brokers issue corrected 1099Bs right up to the deadline, or even beyond. Many partnerships and S-Corps file extensions by March 15, 2019, and don’t issue Schedule K-1s to partners until after April 15. Many securities traders struggle with accounting for wash sale loss adjustments.

The new tax law (TCJA) raises additional complications on 2018 tax returns. There is uncertainty over QBI tax treatment for traders, so we suggest traders eligible for trader tax status (TTS) file extensions. (See Uncertainty About Using QBI Tax Treatment For Traders.)

The good news is traders don’t have to rush completion of their tax returns by April 15. They should take advantage of a simple one-page automatic extension along with payment of taxes owed to the IRS and state. Most active traders file extensions, and it’s helpful to them on many fronts.

Tip 1: Get a six-month extension of time
Request an automatic six-month extension of time to file individual federal and state income tax returns by Oct. 15, 2019. Form 4868 instructions point out how easy it is to get this automatic extension — no reason is required. It’s an extension of time to file a complete tax return, not an extension of time to pay taxes owed. Estimate and report what you think you owe for 2018 based on your tax information received.

Tip 2: Avoid penalties from the IRS and state for being late
Learn how IRS and state late-filing and late-payment penalties apply so you can avoid or reduce them to your satisfaction. 2018 Form 4868 (Application for Automatic Extension of Time To File U.S. Individual Income Tax Return) page two states:

Late Payment Penalty: The late payment penalty is usually ½ of 1% of any tax (other than estimated tax) not paid by the regular due date of your return, which is April 15, 2019, for calendar year filers (April 17, 2019, if you live in Maine or Massachusetts). It’s charged for each month or part of a month the tax is unpaid. The maximum penalty is 25%. The late payment penalty won’t be charged if you can show reasonable cause for not paying on time. Attach a statement to your return fully explaining the reason. Don’t attach the statement to Form 4868. You’re considered to have reasonable cause for the period covered by this automatic extension if both of the following requirements have been met. 1. At least 90% of the total tax on your 2018 return is paid on or before the regular due date of your return through withholding, estimated tax payments, or payments made with Form 4868. 2. The remaining balance is paid with your return.

Late Filing Penalty: A late filing penalty is usually charged if your return is filed after the due date (including extensions). The penalty is usually 5% of the amount due for each month or part of a month your return is late. The maximum penalty is 25%. If your return is more than 60 days late, the minimum penalty is $210 (adjusted for inflation) or the balance of the tax due on your return, whichever is smaller. You might not owe the penalty if you have a reasonable explanation for filing late. Attach a statement to your return fully explaining your reason for filing late. Don’t attach the statement to Form 4868.”

Tip 3: File an automatic extension even if you cannot pay
Even if you can’t pay what you estimate you owe, make sure to file the automatic extension form on time by April 15, 2019. It should help avoid the late-filing penalty, which is ten times more than the late-payment penalty. If you can’t pay in full, you should file your tax return or extension and pay as much as you can.

An example of late-payment and late-filing penalties: Assume your 2018 tax liability estimate is $50,000. Suppose you file an extension by April 15, 2019, but cannot pay any of your tax balance due. You file your actual tax return on the extended due date of Oct. 15, 2019, with full payment. A late-payment penalty applies because you did not pay 90% of your tax liability on April 15, 2019. The late-payment penalty is $1,500 (six months late x 0.5% per month x $50,000). Some traders view a late-payment penalty like a 6% margin loan, and it’s not tax-deductible.

By simply filing the extension on time in the above example, you avoided a late-filing penalty of $11,250 (six months late x 5% per month [25% maximum], less late-payment penalty factor of 2.5% = 22.5%; 22.5% x $50,000 = $11,250). Interest is also charged on taxes paid after April 15, 2019.

If you don’t expect to owe 2018 taxes by April 15, 2019, it’s easy to prepare an extension with no balance due. Make sure to file it on time to avoid a minimum penalty just in case you were wrong and do owe taxes for 2018.

Tip 4: Add a payment cushion for Q1 2019 estimated taxes due
Traders with 2019 year-to-date trading gains and significant tax liability in the past year should consider making quarterly estimated tax payments this year to avoid underestimated tax penalties. The IRS increased AFR interest rates in 2018 and 2019.

I recommend the following strategy for traders and business owners: Overpay your 2018 tax extension on April 15, 2019, and plan to apply an overpayment credit toward Q1 2019 estimated taxes. Most traders don’t make estimated tax payments until Q3 and or Q4 when they have more precise trading results. Why pay estimated taxes for Q1 and Q2 if you incur substantial trading losses later in the year?

It’s a better idea to pay an extra amount for the extension to set yourself up for three good choices: A cushion on 2018 if you underestimated your taxes, an overpayment credit toward 2019 taxes, or a tax refund for 2018 if no 2019 estimated taxes are due.

Tip 5: Consider a 2019 Section 475 MTM election
Traders eligible for trader tax status should consider attaching a 2019 Section 475 election statement to their 2018 tax return or extension. These are due by April 15, 2019, for individuals and corporations and March 15 for partnerships and S-Corps. Section 475 turns capital gains and losses into ordinary gains and losses, thereby avoiding the capital-loss limitation and wash-sale loss adjustments on securities (i.e., tax-loss insurance).

TTS traders might also derive an essential tax benefit from Section 475 ordinary income: TCJA’s 20% qualified business income (QBI) deduction. However, QBI treatment for traders is uncertain at this time. (Read Traders Elect Section 475 For Massive Tax Savings.)

Tip 6: File when it’s more convenient for you
Sophisticated and wealthy taxpayers know the “real” tax deadline is Oct. 15, 2019, for individuals and Sept. 16, 2019, for pass-through entities, including partnership and S-Corp tax returns. Pass-through entities file tax extensions by March 15, 2019. (See March 15 Is Tax Deadline For S-Corp And Partnership Extensions And Elections.)

You don’t have to wait until the last few days of the extension period like most wealthy taxpayers. Try to file your tax return in the summer months.

Tip 7: Be conservative with tax payments
I’ve always advised clients to be aggressive but legal with tax-return filings and look conservative with cash (tax money). Impress the IRS with your patience on overpayment credits and demonstrate you’re not hungry and perhaps overly aggressive to generate tax refunds. It’s a wise strategy for traders to apply overpayment credits toward estimated taxes owed on current-year trading income. You want to look like you’re going to be successful in the current tax year.

The additional time helps build tax positions like qualification for trader tax status in 2018 and 2019. It may open opportunities for new ideas on tax savings. A rushed return does not.

Tip 8: Get more time to fund qualified retirement plans
The extension also pushes back the deadline for paying money into qualified retirement plans including a Solo 401(k), SEP IRA and defined benefit plan. The deadline for 2018 IRA contributions is April 15, 2019.

Tip 9: Respect the policies of your accountants
Your accountant can prepare extension forms quickly for a nominal additional cost related to that job. There are no fees from the IRS or state for filing extensions. Be sure to give your accountant tax information received and estimates for missing data.

Your accountant begins your tax compliance (preparation) engagement, and he or she cuts it off when seeing a solid draft to use for extension filing purposes. Your accountant will wait for final tax information to arrive after April 15, 2019. Think of the extension as a half-time break. It’s not procrastination; accountants want tax returns finished.

Please don’t overwhelm your tax preparer the last few weeks and days before April 15 with minor details in a rush to file a complete tax return. Accounting firms with high standards of quality have internal deadlines for receiving tax information for completing tax returns. It’s unwise to pressure your accountant, which could lead to mistakes or oversights in a rush to file a complete return at the last minute. That doesn’t serve anyone well.

Tip 10: Securities traders should focus on trade accounting
It doesn’t matter if your capital loss is $50,000 or $75,000 at extension time: Either way, you’ll be reporting a capital loss limitation of $3,000 against other income. In this case, don’t get bogged down with trade accounting and reconciliation with Form 1099Bs until after April 15. The capital loss carryover impacts your decision to elect Section 475 MTM for 2019 by April 15, 2019, but an estimate is sufficient.

Consider wash-sale loss rules on securities: If you know these adjustments won’t change your $3,000 capital loss limitation, you can proceed with your extension filing. But if you suspect wash-sale loss adjustments could lead to reporting capital gains rather than losses, or if you aren’t sure of your capital gains amount, focus your efforts on trade accounting before April 15. (Consider our trade accounting service.) Try to do accounting work for year-to-date 2019; it also affects your decision-making on the 475 election.

Section 1256 contract traders can rely on the one-page 1099B showing aggregate profit or loss. Forex traders can depend on the broker’s online tax reports. Wash sales don’t apply to Section 1256 contracts and forex. Cryptocurrency traders should use coin trade accounting programs to generate Form 8949.

Tip 11: Don’t overlook state extensions and payments
Some states don’t require an automatic extension for overpaid returns; they accept the federal extension. If you owe state taxes, you need to file a state extension with payment. States tend to be less accommodating than the IRS in abating penalties, so it’s usually wise to cover your state taxes first if you’re short on cash. Check the extension rules in your state.

Tip 12: U.S. residents abroad should learn the particular rules
U.S. citizens or aliens residing overseas are allowed an automatic two-month extension until June 17, 2019, to file their tax return and pay any amount due without requesting an extension. (See Form 4868 page 2, and the IRS website.)

Darren Neuschwander CPA and Adam Manning CPA contributed to this blog post. 

pleased with GNM’s help

March 8, 2019 | By: Robert A. Green, CPA

Once again, we were so pleased with GNM’s help in our tax preparation. Rachel (Ellis CPA) pointed out that I met the tax trader requirements and was able to characterize the return accordingly. Rest assured, we’ll be using GNM’s services going forward!  Thanks again to Rachel, Adam (Manning CPA) and all the extended GNM team. All the best,

IRS Confirms Section 475 Is Eligible For QBI Tax Deduction

January 21, 2019 | By: Robert A. Green, CPA | Read it on

Good news for traders: Section 199A final regs confirm QBI includes Section 475 ordinary income and loss.

On Jan. 18, 2019, the IRS issued final 199A regs for the 2017 Tax Cuts and Jobs Act (TCJA) 20% qualified business income (QBI) deduction. The final regs update the August 2018 proposed/reliance 199A regs and confirm that QBI includes Section 475 ordinary income/loss.

Based on our interpretation of TCJA and the proposed/reliance regs, we figured QBI included Section 475 ordinary income/loss, but it was uncertain. Our previous content stated that QBI “likely” included Section 475 ordinary income/loss. The final and proposed/reliance regs each state that QBI expressly excludes capital gains and losses, and also excludes Section 954 items of ordinary income, including forex Section 988 and notional principal contracts.

Making our case to the IRS
After noticing that the proposed/reliance regs were silent about Section 475 income/loss, I contacted one of the lawyers at the Office of Chief Counsel listed on the 199A proposed regs.

The attorney called me back after he saw my interview in Tax Notes, “Groups Urge IRS to Rethink 199A Business Income Rules.” I presented our firm’s rationale for including Section 475 ordinary income/loss in QBI for TTS traders and suggested he read and watch our content. The IRS attorney said my rationale sounded “plausible” in his opinion.

Excerpts from final regs
Final 199A regs, p. 55-56:

“Given the specific reference to section 1231 gain in the proposed regulations, other commenters requested guidance with respect to whether gain or loss under other provisions of the Code would be included in QBI. One commenter asked for clarification about whether real estate gain, which is taxed at a preferential rate, is included in QBI. Additionally, other commenters requested clarification regarding whether items treated as ordinary income, such as gain under sections 475, 1245, and 1250, are included in QBI.

To avoid any unintended inferences, the final regulations remove the specific reference to section 1231 and provide that any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss, including any item treated as one of such items under any other provision of the Code, is not taken into account as a qualified item of income, gain, deduction, or loss. To the extent an item is not treated as an item of capital gain or capital loss under any other provision of the Code, it is taken into account as a qualified item of income, gain, deduction, or loss unless otherwise excluded by section 199A or these regulations.

Similarly, another commenter requested clarification regarding whether income from foreign currencies and notional principal contracts are excluded from QBI if they are ordinary income. Section 199A(c)(3)(B)(iv) and §1.199A-3(b)(3)(D) provide that any item of gain or loss described in section 954(c)(1)(C) (transactions in commodities) or section 954(c)(1)(D) (excess foreign currency gains) is not included as a qualified item of income, gain, deduction, or loss. Section 199A(c)(3)(B)(v) and §1.199A-3(b)(3)(E) provide any item of income, gain, deduction, or loss described in section 954(c)(1)(F) (income from notional principal contracts) determined without regard to section 954(c)(1)(F)(ii) and other than items attributable to notional principal contracts entered into in transactions qualifying under section 1221(a)(7) is not included as a qualified item of income, gain, deduction, or loss. The statutory language does not provide for the ability to permit an exception to these rules based on the character of the income. Accordingly, income from foreign currencies and notional principal contracts described in the listed sections is excluded from QBI, regardless of whether it is ordinary income.”

Parsing the language in the final 199A regs
In the proposed 199A regs, QBI excluded all capital gains and losses, and ordinary income/loss items expressly listed in Section 954. Section 954 does not include Section 475 ordinary income/loss. In the proposed regs, QBI expressly included Section 1231 losses from the sale of business property, whereas, QBI excluded Section 1231 capital gains. Section 475 ordinary income/loss is similar to Section 1231 ordinary losses, and it’s not in Section 954, so we determined that QBI likely included Section 475 ordinary income/loss.

The final 199A regs acknowledge the uncertainty and tax writers fixed it in the above language. They opened the door for Section 1231 losses to include more items like Section 475 ordinary income/loss, reiterating that it must not be on the Section 954 list, which Section 475 is not.

There’s an important caveat
Section 199A interacts with a modified Section 864(c), and Section 864 might deny QBI treatment to TTS traders and hedge funds. On the one hand, there is a rationale for QBI treatment for TTS traders, as expressed in this blog post, and Section 864 conflicts with that case. There are unresolved questions which I expect to write a blog post about it soon. Considering conflicts with Section 864, I think QBI treatment for traders is uncertain at this time.

How QBI might work for a TTS trading business
The proposed and final 199A regs state that traders eligible for trader tax status are a “specified service trade or business” (SSTB), so the SSTB taxable income (TI) cap applies. Taxpayers who make one dollar over the TI cap will not be allowed a QBI deduction on SSTB QBI. On the other hand, non-SSTB activity is not restricted to the TI cap, although the W-2 wage and property limitations apply over the TI threshold.

For 2018, the SSTB TI cap is $415,000/$207,500 (married/other taxpayers). The phase-out range below the cap is $100,000/$50,000 (married/other taxpayers), in which the QBI deduction phases out for an SSTB. The 50% W-2 wage and property basis limitations also apply within the phase-out range. For 2018, the TI threshold is $315,000/$157,500 (married/other taxpayers): If a taxpayer is below the TI threshold, there are no phase-out, wage or property limitations for SSTB and non-SSTB.

For 2019, the SSTB TI cap increases to $421,400/$210,700 (married/other taxpayers) based on the inflation adjustment. The phase-out range remains the same, so for 2019, the TI threshold is $321,400/$160,700 (married/other taxpayers).

Hedge funds with TTS and Section 475 ordinary income/loss should report QBI, too. Investors in these hedge funds are eligible for a QBI deduction if they are under the TI cap. Even without a 475 election, trading SSTB has QBI losses from trading expenses.

Investment managers are also SSTB, and they have QBI from advisory fees. Carried interest as a profit allocation of Section 475 ordinary income/loss is QBI, too. Carried interest in capital gains is not.

It’s more crucial to qualify for TTS than ever before
TTS allows business expense treatment, whereas, TCJA suspended “certain miscellaneous itemized deductions subject to the 2% floor,” which includes investment fees and investment expenses. TCJA still allows investors itemized deductions for investment-interest expenses limited to investment income, and stock borrow fees as other itemized deductions. TTS business expenses allow a long list of deductions from gross income, including home office, and that’s far better!

TTS traders may elect Section 475 mark-to-market (MTM) accounting on securities and or commodities (Section 1256 contracts). Securities traders appreciate that Section 475 trades are exempt from dreaded wash-sale loss adjustments and the $3,000 capital loss limitation. I call it “tax loss insurance,” because 475 ordinary losses lead to much faster tax refunds. (TCJA did repeal NOL carrybacks, forcing NOL carryforwards, instead.) TTS traders are entitled to segregate investment positions to achieve lower tax rates on long-term capital gains. TTS traders prefer to skip Section 475 on commodities to retain lower 60/40 capital gains rates on Section 1256 contracts.

Now with final 199A regs, there’s still uncertainty for QBI treatment for TTS traders. Profitable TTS traders might want to consider a Section 475 election to be perhaps eligible for a potential QBI deduction. In some years, the trader might be under the TI cap, allowing a QBI deduction, and in other years, he might have a (good) problem of exceeding the cap for no QBI deduction.

Married taxpayers should consider filing separately, as that might unlock a QBI deduction for one spouse since the other spouse might have income exceeding the SSA income cap. TCJA equalized the tax rates for filing jointly vs. separately.

TTS traders with Section 475 ordinary losses might be unhappy. For example, assume a trader has $100,000 of QBI from a consulting business. She also has TTS/Section 475 ordinary losses of $40,000, so her aggregate QBI is $60,000, which reduces the QBI deduction.

Section 199A regs are complicated
There are complex issues over what constitutes an SSTB vs. non-SSTB, how to calculate the W-2 wage and property limitations, definitions of QBI, and more.

Taxpayers have to calculate the QBI deduction on whichever is lower: aggregate QBI or taxable income minus net capital gains/losses.

If you expect to receive a 2018 Schedule K-1 containing QBI tax information, then consider filing an automatic extension by April 15. I assume that many pass-through entities won’t issue final 2018 Schedule K-1s until after that date. It’s great that the IRS issued the final 199A regs now, but there are still conflicts and unresolved questions. Look for QBI items on partnership Schedule K-1 line 20 “Other Information” marked with various codes for 199A items of income, wages, property and more. See the K-1 instructions for line 20.

Elect Section 475 on time
Individual TTS traders need to file a 2019 Section 475 election statement with the IRS by April 15, 2019. Existing partnerships and S-Corps need to file a 2019 Section 475 election statement with the IRS by March 15, 2019. New taxpayers (i.e., new entities) may elect Section 475 within 75 days of inception by internal election. Existing taxpayers have a second step to file a Form 3115 with their 2019 tax return.

Learn more about TTS, Section 475, QBI and entity solutions in Green’s 2019 Trader Tax Guide.

Darren L. Neuschwander, CPA contributed to this blog post.

I revised this blog post on March 5, 2019, in conjunction with my new blog post Uncertainty About Using QBI Tax Treatment For Traders