Tuesday, April 24, 2007

Trader Tax Status


Trying to decide whether you should file for Trader Status or elect MTM accounting?
I've been doing some research and found some good information that may help.

Trader vs. Investor-

The only difference between filing your taxes as a trader when compared to an investor (considering your not a MTM trader) is-
1. You can deduct all your investing expenses on Schedule C, like any other sole proprietor. This is great, because investors have to account for these expenses on Schedule A, where they can write off only the amount that exceeds 2% of their adjusted gross income. Plus Schedule C writeoffs reduce your adjusted gross income, which raises the odds that you can fully deduct all your personal exemptions and take advantage of other tax goodies.

2.You can also deduct your margin account interest on Schedule C and probably take an immediate writeoff of up to $108,000 for 2006 ($112,000 for 2007) for equipment used in your trading activities more than 50% of the time (computer stuff, desk, bookshelves, fax machine, etc.; it's called a Section 179 writeoff). Home-office deduction? Sure, as long as you use the space regularly and exclusively for trading and the deduction doesn't throw you into a net loss position. Finally, you don't have to pay self-employment tax on your net profit, because capital gains are exempted. All in all, a pretty good deal.

3.If you're a trader, you will still report gains and losses on Schedule D, and can still deduct only $3,000 in net capital losses each year. All this makes for a pretty funky-looking tax return. Schedule C will have nothing but expenses and no income, while your trading profits (we hope) will end up on Schedule D. I recommend attaching a statement to your tax return to explain the situation.
(info courtesy smartmoney.com)

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