Traders Taxes -- Income Tax Returns
The IRS will also look at the frequency and dollar amount of your trades; how long you held the securities; the extent to which trading is used to make income for your livelihood; and the amount of time you spend on trading. Basically this means you must not be a part-time trader.
The difference for an individual taxpayer as to whether they are in the business of a trader or simply an investor is in the treatment of trading expenses. The gains and losses are treated the same and are reported as capital gains and losses on Form 1040 Schedule D. Emini futures traders must also complete Form 6781.
If you are classified as being in the "trading business", your trading expenses are fully deductible as a business expense on Schedule C. If you are an "investor", your trading expenses are no longer allowed as a deduction.
The Internal Revenue Service (IRS) trader income tax return rules have always been somewhat complicated and unclear. The first thing is to determine if you are in business as a "trader in securities".
The emini S&P and all other emini futures do qualify as securities. This discussion focuses on the emini futures but generally is the same for all securities.
To be in the business as a trader in securities, you must seek to profit from daily price movements in securities -- not from appreciation, interest or dividends. Your trading must be substantial with continuity and regularity.
Trading gains and losses whether as an investor or in the business of trading are not subject to the self-employment tax which is really a combined social security and medicare tax.
The bad news is that you cannot make a retirement plan contribution based upon your trading. The IRS does not consider trading gains as "earned income", which is a prerequisite for making a contribution. This includes any contribution to an Individual Retirement Account (IRA); 401K Plan; Simplified Employee Pension Plan (SEP); or any other type of pension plan.
You can though, contribute to a retirement plan if your trading business is set up as a separate entity such as a corporation. Your trading gains could then be paid to yourself as a salary, which qualifies as earned income.
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Trader Tax Returns - Trading Business - Qualify For a 401k and IRA - Form 6781