Tax Forms And Compliance

Tax compliance is complex for traders with lots of different tax forms.

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.

Tax form changes in 2018
TCJA required significant revisions to 2018 income tax forms. This 2019 guide refers to 2018 (draft) tax forms, schedules, line items, and worksheets.

The redesigned two-page 2018 Form 1040 resembles a postcard because the IRS moved many sections to six new 2018 Schedules (Form 1040). It’s a block-building approach with the elimination of Form 1040-EZ and 1040-A.

The new 2018 Schedule 1 (Form 1040) is used for reporting “Additional Income” including state tax refunds, Schedule C, D, E, Form 4797 (Section 475), and Other Income/Loss (Section 988 forex) on line 21. It is also for reporting “Adjustments To Income,” previously called items of “adjusted gross income” (AGI).

The IRS significantly changed the 2018 Schedule A (Itemized Deductions). TCJA suspended “certain miscellaneous itemized deductions subject to the 2% floor.” These deductions were included in “Job Expenses and Certain Miscellaneous Deductions” on the 2017 Schedule A, lines 21 through 24. The revised 2018 Schedule A deletes these deductions, including job expenses, investment fees and expenses, and tax compliance fees and expenses.

The 2017 Schedule A also had “Other Miscellaneous Deductions,” not subject to the 2% floor, on line 28. That’s where an investor reports stock-borrow fees, which are not investment fees and expenses. The 2018 Schedule A changed the name to “Other Itemized Deductions” on line 16.

TCJA introduced a new “qualified business income deduction” on page two, line 9 of the 2018 Form 1040. It’s below the standard or itemized deduction on line 8.  The IRS does not currently provide a 2018 tax form or schedule for the complicated QBI deduction. Tax preparation software should generate a QBI deduction worksheet including QBI income/loss, 50% wage and property limitations, taxable income thresholds, and income caps for specified service activities.

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…

Section 1256 contract traders (i.e., futures) should use Form 6781…

Forex traders with Section 988 ordinary gains or losses who don’t qualify for TTS should use line 21 (other income or loss) on 2018 Schedule 1 (Form 1040). TTS traders should use 2018 Form 4797, Part II ordinary gain or loss…

Excerpt from Green’s 2019 Trader Tax Guide. See Chapter 6 on Trader Tax Return Reporting Strategies.

Consider our tax compliance (preparation and planning) services.