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Tax preparers and their software-based counterparts often come up short with traders. Be as diligent in preparing your taxes as you are when exploring the best low cost options trading platforms. Use these seven tips this tax-filing season. Information regarding portfolio income, gains and losses and business and investment expenses are entered on numerous forms, which often leads to confusion. Doing so takes a step to address any questions the IRS may have about TTS qualification and the various aspects of its reporting on your return before it has a chance to ask.
Tax savings can be significantly impacted by which financial products you trade and where you trade them. Capital Gains Most financial instruments, including securities, options, ETFs, indexes, options, Section contracts, Bitcoin and precious metals are held as capital assets, which means they are subject to capital gains treatment.
This distinction makes a world of difference. The capital-loss limitation is a problem for investors and traders who may have trouble using large capital-loss carryovers in subsequent tax years. Traders who have TTS and a Section MTM election have business ordinary loss treatment, which is more likely to generate tax savings or refunds faster.
Form is used for general partnerships and multi-member LLCs choosing to be taxed as partnerships. Forms and S issue Schedule K-1s to the owners, which makes it so taxes are paid at the owner level instead of the entity level, thus avoiding double taxation. Ordinary income and loss mostly business expenses get summarized on Form Schedule E instead of in detail on Schedule C. Section , though, is split up on Schedule E — as are unreimbursed partnership expenses UPE , which includes home office expenses.
Portfolio income is passed to Schedule B. Capital gains and losses go to Schedule D in summary form. S-Corps provide additional tax breaks, which include opportunities for employee benefit plans, like retirement plans and health insurance premium tax deductions, two breaks sole proprietor and partnership traders cannot use, though, unless they have a source of earned income.
Nonetheless, health insurance is a great deduction through trader S-Corp because there is no payroll tax on that portion of W-2 wages. The next priority is for for existing partnerships and S-Corps. Forex Section capital gains election is only filed internally, and is done on a contemporaneous basis. If you are filing as an investor, you should report trading gains and losses according to the earlier explanation. Report investment interest expense margin interest using Form It is limited to investment income and investment expenses, and the balance is an investment interest expense carryover to future tax years.
The deduction is taken on Schedule A, where it could be subject to the Pease limitation, but it is deductible for alternative minimum tax. Report investment expenses as miscellaneous itemized deductions on Schedule A. Many states limit or do not allow itemized deductions. Business expense treatment with TTS is much better.
Investment expenses are allowed for the production of investment income. Investment expenses exclude home office, education, seminars, travel to seminars, and startup expenses. Computers and monitors are allowed if they are predominantly used for managing investments. This article is provided for educational purposes only and is not considered to be a recommendation or endorsement of any trading strategy. The author is not affiliated with Lightspeed Trading and the content and perspective is solely attributed to the author.
Navigating Taxes as an Active Trader. Large Cap Momentum Trading. Open an Account Try a Demo.