Trading Business Setup and Tax Planning

Aug 13, 2024

Lecture on Trading Under a Business and Tax Implications

Introduction

  • Presenter: Abby Joseph, financial expert with a specialization in tax planning for traders.
  • Focus on helping traders set up entities and manage taxes effectively.
  • Emphasis on interactive learning; encourages questions throughout the lecture.

Key Points

Understanding Your Status as a Trader

  • Traders often see themselves differently than the IRS does.
  • IRS classifies individuals as either Traders or Investors.
  • Investor: Buys and sells securities expecting income from dividends, interest, or capital appreciation.
  • Trader: Actively engages in the buying and selling of securities as a business.
  • Importance of IRS Publication 429 for understanding tax obligations.

Trading Under a Business

  • Trading under an LLC or S-Corp provides tax benefits.
  • TTS (Trader Tax Status):
    • Allows deduction of business expenses.
    • Not an entity, but an IRS allowance for active traders to deduct expenses.
  • Mark-to-Market (MTM) Election:
    • Eliminates the wash sale rule.
    • Allows unlimited net loss deduction within a year.
    • Must be filed within 75 days of setting up the entity.

Types of Traders and Tax Considerations

  • Individual Self-Directed Investor:

    • Limited to $3,000 per year in net loss deduction.
    • Taxed on capital gains (up to 20% long-term, 37% short-term).

  • Trader as a Business:

    • With and without MTM election.

Setting Up the Right Business Entity

  • LLC: Basic structure, pass-through entity, taxed at personal income level.
  • S-Corp: Requires payroll, benefits like pre-tax contributions, better for incomes over $50,000.

Tax Planning

  • Importance of planning to minimize tax liability.
  • Utilizing pre-tax contributions to move funds efficiently.

Practical Aspects of Trading Under an Entity

  • IRS does not specify a minimum amount to start trading under an LLC.
  • Trading activity should be substantial and regular.
  • Separate personal and retirement accounts from trading accounts for clarity and tax purposes.

Avoiding Common Pitfalls

  • Wash sale rules and their impact on taxes.
  • Importance of maintaining clear records and separating long-term investments from active trading.

Services Offered by Abby Joseph

  • Entity setup and management.
  • Tax planning and filing for traders.
  • Ongoing support with financial and tax strategies for trading.

Conclusion

  • Encouragement to start trading under an entity to benefit from tax deductions and planning.
  • Invitation to follow Abby Joseph for continued learning and to consider hiring her services for tax management.

Q&A Highlights

  • Clarifications on entity setup and tax advantages for different types of trading activities.
  • Discussion on the impact of trading volume and account management on tax status and deductions.

This lecture provides a detailed overview of the benefits and processes involved in setting up a trading business entity, navigating IRS classifications, and leveraging tax deductions effectively.