Home Based Trader

Traders Accounting does not use a cookie cutter or automated approach for your trading tax savings. Your recommendation is based on the information you provide as the individual trader. Active trader business incorporation services are tailored to meet your unique needs for tax efficiency. The first step in the process is to determine your trader’s tax status. Will you meet the definition of a trader in securities per IRS and tax court guidelines.

• As an individual these vague guidelines leave many questions.
• How long can I hold my positions?
• How often do I have to trade?
• How many trades does it take to be considered substantial activity?
• If the market is not conducive to my trading strategy how long can I stay out of the market without bringing my continuity and regularity of trading into question?

The above are a just a few examples out of a myriad of questions the IRS and the tax court looks at to determine a trader’s tax status. Unfortunately, the IRS does not seem interested in offering any help. Instead, they seem more than happy to leave it up to the tax courts to determine how these guidelines apply in the real world. While tax court justices excel at interpreting tax law, it can be difficult to use their decisions to develop black and white rules. Each individual’s circumstances are unique and may be interpreted differently.

Because of the uniqueness of each individual, there is no one sure-fire strategy to make an active trader immune to the effects of murky trading tax law. We generally recommend that active traders conduct their active trading business in a legal entity (usually an LLC). When you set up a legal entity to trade in, the mere act of setting up the entity tells the IRS that you are going into the active trading business. That said, if you are a trader, you still must be an active short term trader in an entity. You must treat your trading as a business; learning to document your trading time, your expenses, and a few other matters.

To determine whether an individual is in the business of trading, as a Sole Proprietor, the IRS looks at three main factors.

• You must seek to profit from daily market movements in the prices of securities,
• Your trading activity must be substantial, and
• You must carry on the activity with continuity and regularity.

In order to determine if the active trader is following these conditions the IRS looks at the following facts and circumstances:

• Typical holding periods for securities,
• The frequency and dollar amount of trades,
• The extent to which you pursue the trading activity to produce income for a livelihood
• The amount of time devoted to the trading activity

While trading in a legal entity does not automatically guarantee that the IRS or tax court will consider the trading activity to be in the active trading business, it does offer some other benefits. Generally, a legal entity files a separate income tax return from the individual. Filing a separate income tax return allows you to provide the IRS with a clearer picture of your trading business because the business activity is not co-mingled with individual activity on one return. The more clearly your information is presented to the IRS upfront the fewer problems you will have in the future. In addition, forming a trading business entity can separate the business assets from your personal assets which may provide some asset protection depending on state law. Also, legal entities can allow traders to establish benefits that are traditionally associated with businesses such as 401(k) plans. These are just a few benefits that legal entities can provide.

Common Trading Legal Entities

Limited Liability Company (LLC):

An LLC taxed as a partnership is a popular choice of entities. To be taxed as a partnership the LLC must have at least two members. The LLC, taxed as a partnership, is a pass-through entity. This means that while the LLC files its own return the income or loss from trading flows to the members and is reported on the members’ individual income tax returns. The LLC allows the members to take distributions of capital which provides a method of taking money out of the LLC without having to pay payroll taxes. In addition, the trading income from an LLC is not subject to self-employment tax. Don’t be confused by Single Member LLCs (SMLLC). When you trade through an SMLLC, the IRS considers your SMLLC a disregarded entity for tax purposes. This causes you to file a Schedule C on your individual income tax return, thus you are effectively trading as a sole proprietor. An LLC files its own return but does not pay tax. The income or loss from trading flows to the members and is reported on the members’ individual income tax returns. The LLC allows the members to take distributions of capital which provides a method of taking money out of the LLC without having to pay payroll taxes. In addition, the trading income from an LLC is not subject to self-employment tax.

Limited Liability Company (LLC): An LLC is a business entity created under state law that may shield you from personal liability.
LLCs are becoming the most popular choice for traders due to their ease and flexibility.

C-Corporation:

The C Corporation is frequently used for its ability to offer benefits, such as Medical Reimbursement Plans, which do not work well in pass-through entities. The C Corporation is a standalone entity which means the income from trading is taxable to the C Corporation and does not flow through to the individual owners. Profits are generally removed from the C Corporation through salary or dividends.  C corporations have greater tax planning flexibility and can shield shareholders from direct tax liability, but require more work, such as holding annual meetings, etc.

How to Make Money Trading Stocks at Home:

As people pursue a home-based business to augment their income, they are looking for work from home jobs that offer flexibility, and financial independence. Men and women who have children at home or full-time jobs can trade – it is just a matter of obtaining the right opportunity. The idea of trading for a living at home is appealing to many people who have considered trading as a business. If you want to become a full-time trader from home, it’s important that you take the time to plan and research your trading business.

After spending some time thinking things over about starting a new business with trading, many traders that are new to home-based trading will need expert advice. Save yourself the frustration with your taxes by consulting directly with the recognized leading CPAs and other trader professionals in the field.

Get expert advice with our free 30-minute consultation. Our free consultation can save you thousands of dollars. When scheduling your online appointment, we just need a few details from you — your name, phone number, and email.

Setting up a trading entity at home correctly is an important step if you plan to work as a full-time trader. Our business entity packages will allow you to take advantage of many benefits that the typical investor does not have access to. From our two packages, you will receive some of the following benefits:

• Home Office Deduction
• Trading Entity Operating Documents
• Trading Entity Consultation Services
• Bookkeeping Services
• Bookkeeping coaching for traders
• Free 1st Year Federal and State Tax Returns
• Mark-To-Market Coaching
• Obtain a Federal Tax ID (EIN)