Consider wash sales, Section 475 elections, entities, TTS, estimated taxes and tax reform.
The Tax Cuts and Jobs Act did not change trader tax status (TTS), Section 475 MTM, wash sale loss rules on securities, Section 988 forex rules, entities, and employee benefits for traders. That’s the bulk of content in this section. The Act suspended investment expenses, making trader tax status even more attractive in 2018.
The most significant news in the Act for TTS traders with Section 475 ordinary income might be the 20% deduction on qualified business income. (See Chapter 17 of our guide.) There’s ample time in 2018 to rearrange the timing of your investments, trading, and retirement and business affairs to improve your overall taxes going forward.
Securities traders must comply with wash sale loss rules (Section 1091) and the IRS makes it more difficult for them by applying different rules for taxpayers vs. brokers on tax reports and Form 1099-Bs. Taxpayers must report wash sales on substantially identical positions across all accounts, whereas brokers report only identical positions per account. Use a good trade accounting program or service to identify potential wash-sale loss problems. In taxable accounts, break the chain by selling the position before year-end and not buying a substantially identical position back 30 days before or after in any of your individual taxable or IRA accounts. (Starting a new entity effective Jan. 1, 2019 can break the chain on individual account wash sales at year-end 2018 provided you don’t purposely avoid wash sales with the related party entity.)
Section 475 elections
Business traders qualifying for trader tax status (TTS) like Section 475 on securities for exemption from wash-sale rules and capital loss limitations. Section 475 ordinary losses contribute to NOL refunds. Individuals can elect Section 475 by April 17, 2018, for 2018 (March 15 for existing S-Corps and partnerships).
A “new taxpayer” entity can elect Section 475 within 75 days of inception. Consider that for 2017, especially later in the year. But it’s too late to form a new trading entity by late November and still qualify for TTS in that short period before year-end. Unlock employee benefit plan deductions for traders with an S-Corp trading company or C-Corp management company with a trading partnership. Sole proprietor traders can’t have employee benefit plan deductions since trading income is not self-employment income (SEI). An entity formed late in the year can unlock employee benefit plan deductions for an entire year by paying officer wages in December.
Trader tax status
If you qualify for TTS (business expense treatment — no election needed) in 2018, accelerate trading expenses into that qualification period as a sole proprietor or entity. If you won’t qualify until 2019, defer trading expenses until then. You may also capitalize and amortize Section 195 startup costs in the new business, going back six months before commencement. Business expense treatment is far better than investment expense treatment.
Many traders omit or underpay Q1, Q2 and or Q3 2018 estimated tax vouchers since they think they could lose money later in the year. Q4 is the time to catch up based on actual profit or loss. Don’t overlook the “prior year safe harbor” rule: You only have to cover 100% of 2017 taxes, 110% if AGI was over $150,000, with the balance of 2018 taxes payable April 15, 2019.
For more in-depth information on tax planning read Green’s 2018 Trader Tax Guide.