If you are a trader in securities, when you file a tax return with the IRS, the IRS treats you as an investor by default. Being an investor, your income from trading is classified as either long term or short term gains or losses by the IRS and is taxed as capital income. While long term capital gains enjoy a lower tax rate, this is not an ideal situation for you if you want to treat your trading as a business and generate substantial income from it.

As an investor, you must report all expenses incurred while trading as investment expenses on Schedule A of your tax return. The wash sale rule may also apply to bar you from claiming certain losses which prevents you from claiming a loss on a sale of stock if you buy replacement stock within the 30 days before or after the sale. Because you are filing as an individual, you do not enjoy any fringe benefits and medical reimbursements or educational costs to better your trading.

They would be pure expenses for you. On the contrary, you may be able to claim trader status and elect mark to market accounting with the IRS. If you qualify for trader status, the IRS regards you as an active trader and all of your losses from trading become active, ordinary losses for tax purposes.

Because the IRS regards your primary source of income as trading, you are allowed to deduct various business expenses on your Schedule C.

Expenses such as accounting fees, automobile expenses, trading software, trading advice, office equipments, and costs of attending seminars, etc. Further, due to the election of mark to market accounting, the wash sale rule no longer applies as well. Trader status is exactly what I need. Here are the reasons why:. If you are just starting out to trade, chances are that you will not qualify for trader status.

The IRS has laid out general guidelines in Publication regarding the requirements for trader status. To qualify as a trader, you must at the very least 1 trade substantially, regularly, frequently, and continuously; 2 seek to profit from the short term price swings of the securities. While this may sound simple, it is actually very confusing because this attempted definition is overly vague.

The courts have attempted to simplify the determination of trader status over the years. However, these attempts have never successfully clarified exactly what a trader is under the law. There are major inconsistencies.

For example, in Commissioner v. Nubar, the court found that transactions a year qualified Mr. Nubar as a trader. That would lead you to conclude that somehow qualifies, but there are cases where traders with over trades per year did not qualify.

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For example, in Estate of Yaeger v. Commissioner, the court found that despite over transactions per year in question, Yaeger did not qualify as a trader. Commissioner, trades did not qualify. The court considers many factors when deciding. Yaeger was in and the court used the fact that the taxpayer held on to stocks for a long period of time over a year prior to selling to denied the taxpayer trader status.

Holsinger was in and the court held that the actual days where trades occurred i. Who knows what a sufficient amount to qualify as a trader will be in ? In fact, based on our research since , there are NO court opinions where trader status was granted.

There is simply no way to predict for certain whether you will qualify for trader status when the IRS comes knocking on your door. This is not the only reason why you should not trade in your own name and claim trader status. From the legal standpoint in assessing what structure is best for someone to do business in, three aspects should be evaluated: By claiming trader status and trading in your own name, you may think you have the tax arena covered, but the truth may be surprising to you.

Also, you are taking a big risk with regards to asset protection and estate planning. Conducting trades in your own name and claiming trader status provides no asset protection at all. All of your assets including cash, securities, and potentially real estate and equipment are sitting under your name — up for grabs by any creditors.

In this litigious society, there are too many ways you could be the subject of a lawsuit. Should you unfortunately come out on the wrong side of a lawsuit and are pursued by creditors, it would simply be too late to set up any sort of asset protection structure. In fact, any structure established at such time may be pierced by the court because the sole purpose would appear to be siphoning assets away from your creditors.

Trading in your own name with trader status also provides no benefit in terms of estate planning. Again, all your assets are simply exposed and disorganized under your name. This only makes the settlement of your estate more complicated and costly for loved ones. As previously described, claiming trader status and mark to market election gives you the ability to reap certain tax benefits:. However, once you claim the trader status, these benefits may not turn out to be as wonderful as they seem.

Electing mark to market accounting has to be done prior to the year you wish to utilize such method. This adds uncertainty because you do not know whether you will benefit from such accounting method at the time you elect it.

Further, the election is irrevocable. Once you make the election — you are stuck. You will need a written permission from the IRS in order to elect out of mark to market. This is very inconvenient and ironic especially considering that trading is the kind of activity where lots of flexibility and anticipation are needed.

Mark to market accounting gives you the benefit of avoiding the wash sale rule. The wash sale rule is avoided because mark to market requires you to report gains and losses on all securities held at the end of the year, even if you have not sold them.

This is actually a major downfall for this accounting method because you could end up paying excessive taxes before you realize any gains on securities. For example, if a security peaks its price at the end of the year, you will have to pay taxes at that peak as if you have realized a gain even though you have not. When you finally sell such security and the price has fallen off, you essentially have paid a higher tax than you would have had to.

Why would you willingly put yourself in that situation? The unlimited ordinary loss deduction available to traders is plainly a counter-intuitive idea for claiming trader status. The whole purpose of claiming such status is because you seek to trade securities and conduct such activity as a business, in order to make a profit. It makes no sense for you to claim the status in order to write off the losses. If you know you are going to lose money trading, you might as well not trade in the first place.

Further, this benefit can actually never be realized for a single taxpayer who claims trader status. The reason is because the IRS and the courts would not allow someone who has other employment to qualify as a trader.

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In other words, you would not have any other ordinary income other than the income from trading. However, to claim the loss deduction you would have lost money from trading. Because you have no ordinary income from trading and you are not permitted to have other ordinary income from activities outside of trading, you would not be able to write off the trading losses against anything. Considering all three aspects asset protection, lawsuits and taxes , for a trader, there is a much better solution than claiming trader status with the IRS and trading in your own name.

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Since you are serious about trading, the best solution is to operate like a business. Operating a business with a proper business structures ensures that you are treated as a business by the IRS and receive the maximum tax benefits that a legitimate business should receive. At Anderson, we have done diligent research and carefully devised a structure that best serves this purpose for people trading in the stock market.

The purpose of the structure is to maximize asset protection, estate planning and tax benefits in a comprehensive structure. While using a structure is not the equivalent of claiming trader status, it is a much more comprehensive and safer structure for an individual who trades. Even though the wash sale rule stays effective with this structure, it can be easily navigated by a careful trader.

This structure ensures that you would not have to deal with the burden and uncertainty of complying with the requirements of the trader status. It also avoids the rigidity and risk that accompanies mark to market accounting. The trading structure also provides you with the benefits in asset protection and estate planning, which is otherwise unavailable to individuals merely attempting to claim trader status.

All in all, this is a much better system for traders in security to run as a business. If you are serious about trading, it is highly recommended that you establish the business structure rather than claiming trader.

TOLL-FREE Las Vegas Office Anderson Business Advisors McLeod Dr. Tacoma Office Anderson Business Advisors, PLLC Broadway, Suite , Tacoma, WA Anderson has committed to building homes for the less fortunate through King's Ransom Foundation. Facebook Twitter Google Clients Forms Meeting Minutes Payment Login. Here are the reasons why: It is extremely difficult to qualify as a trader. Asset Protection Conducting trades in your own name and claiming trader status provides no asset protection at all.

Estate Planning Trading in your own name with trader status also provides no benefit in terms of estate planning. Tax As previously described, claiming trader status and mark to market election gives you the ability to reap certain tax benefits: In addition, it provides many tax benefits that are not available to individual taxpayers.

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