[Music] in today's episode I'm going to share with you the Tax Strategies the top 1% a day Traders are using to pay zero capital gains taxes on their trading profits I have implemented some of these strategies in my own trading and I have personally saved millions of dollars in unnecessary tax payments as you may know my name is Ross Cameron I'm a full-time Trader and I funded my first account in 2001 more than 20 years ago in 2017 I challenged Myself by funding a tiny account with $583 15 I have since grown that account to over $10 million in fully verified and independently audited trading profits so $10 million of profit in the United States with federal income tax and state income tax could be at least 40% tax that's $4 million of tax gone but I didn't pay that $4 million of tax because I implemented some of the strategies I'm going to share with you today now it doesn't matter if you've made $10 million of trading you're making a million you're making $100,000 doesn't matter if you're making $10,000 trading some of these strategies you can Implement today in your own trading but they don't work retroactively they work starting today and moving forward so let's go ahead and jump into this class I've got a lot to cover this is some really important stuff so I'm going to go full screen on this slide deck most traders overpay in tax due to the following reason reasons number one paying short-term capital gains tax on all their trading profits short-term capital gains here in the United States are taxed at your ordinary income level your for your income bracket you don't get the lower tax rate of long-term capital gains when you're day trading so your tax basically almost as if it's regular income now if you were going to compare and we'll jump on the Whiteboard here $100,000 of profit from day trading versus $100,000 of profit as a W2 you're going to have more tax on the W2 because of the employment taxes you're not going to have any of those employment taxes related to the 100K you may day trading so it is you're going to pay less tax making $100,000 day trading than 100,000 on W2 but most Traders are going to overpay because all of that income is going to be taxed as short-term capital gains and there's other ways to categorize that income and utilize deductions to reduce your total taxable income number two most Traders overpay by facing higher income due to wash sales that are disallowed in this episode we're going to talk about what that means but if you've gotten a$ 1099 already from one of your Brokers you may see a little item that says wash sales disallowed and a dollar amount so let's say for instance you have $100,000 of trading profits and then it says you've got $155,000 of wash sales disallowed you're actually going to have $115,000 of taxable income and what's really ridiculous about this is that you didn't make $115,000 but this $ 15,000 those were losses that you're not allowed to write off against income it's this is kind of a it's a rule in the tax code that dates back to when people used to sell a position in December and then buy back basically the same position in January and they did that so they could lock up a a loss essentially so they would take a loss by selling a position for a loss and then just buy it back the next day you know January 1st and the problem with that was the IRS said well wait a second you know they've bought back a substantially similar position within 30 days we're not going to allow them to write off that initial loss you can't do that if you buy it back that's why you don't get your $199 until February you don't get it on January 1st because they have to wait to see if you bought back a substantially similar position so the problem here for day Traders is that we might trade the same stock 100 times in one day and then all of a sudden we're being told by our broker and the IRS that we can't write off the losses let's say I had a day where I made $10,000 but I had 20,000 in profit and 10,000 in losses so if I can't write off the 10,000 in losses do I pay income tax on $20,000 in profit and in theory that can happen now this is something that is can be avoided and I'll share with you the strategy to avoid these wash sales number three most Traders overpay tax because they're limited to writing off only $3,000 of losses against income so let's say you're a beginner Trader you jump into the market real money head first in the deep end and you lose $50,000 that's terrible it's not fun but it's happened a lot of Traders I took big losses when I was getting started too but if you have big losses and youve set yourself up correctly you can deduct them against other income but most Traders are going to only be able to deduct $3,000 against other income so let's do this scenario again let's say for instance that you didn't make $100,000 let's say let's say you lost $100,000 and then you've also got wash sales disallowed so it's actually going to say you lost $85,000 so you lost more but it's not letting you write off as much as you actually lost but anyways you're down 85,000 but let's say you had $200,000 of income from you know rentals or W2 or long-term gains or whatever the case is well that's nice what would be awesome is that if you could have your net income be down at 115 Grand right 200 minus 85 but because you're only allowed to write off $3,000 of the 85 that you lost your adjusted income is 197,000 so you're paying tax on this larger amount even though you lost money that's a drag it's not fun to lose money but if you can at least get a tax benefit on it that makes sense now to make matters worse let's imagine that you spent you know $5,000 on the cost of Education software you know computers uh you know extra couple monitors things like that well you know it' be nice to offset that against the income as well but most Traders don't know how to do it and they're not going to do it and therefore they're going to pay more in tax they're overpaying versus what they need to number four most Traders are going to overpay in tax because they're not going to use some of the profits to contribute to retirement accounts even though and and let me just say the strategies that I'm going to share with you today not only are they legal they are encouraged these are strategies that are available to encourage and help Americans save money for retirement or in some cases build a small business or in other cases well get into all the details but nonetheless these are strategies that are not only legal they are encouraged and so if you're not taking advantage of them you're just leaving money on the table and in fact you're spending money that is totally unnecessary in taxes number five most Traders are unable to write off the expenses related to trading and I know it's easy to kind of disregard maybe how much you're spending but you're subscribing to scanners you go to a seminar you pay for a course like well we have at Warrior trading you have your computer all this stuff all of that adds up now at the end of the year if you added all that up and it's a couple thousand doar why wouldn't you deduct that as expenses that was necessary and reasonable in order to generate the profit that you generated that's what every other small business would do but Traders often neglect to do it so this is what where we've got to get a little bit smarter so now I want to talk about this is a concept of what's more important being more profitable or being more tax efficient it's kind of a funny question because when you think about it right now because in my account I pay zero capital gains taxes on my trading profits if I make a million dollar I'm walking away with a million dollar of profit at the end of the year another Trader would have to earn you know 1.5 million 1.6 million depending on what state they lived in to net the same amount at the end of the year that means I can make less and actually walk away with more so while it's always a good goal to make more money to be more profitable and to be more consistent it also makes a lot of sense to do everything you can to be more tax efficient because if you're more tax efficient then well you you have more money in your pocket at the end of the year so 200 a day if it's actually 200 a day that's $52,000 a year right if it's 200 a day but then I'm not doing any of these Tax Strategies your net your take home's going to be less so let's get smarter about how we're managing our taxes and we've got a plan ahead so for some of you who are watching this video you might think shoot I wish I had done this sooner I wish I had done a lot of the strategies I'm going to share with you sooner as well it's better late than never so don't lose hope because you can always uh Implement these strategies today and then they help you moving forward so how would you like to pay zero capital gains taxes on all your trading profits there are two ways that you can do it I'm using one of them now when I so and I'll also let me just say that when I started making good money trading I hired a really good CPA so I've got I had a couple different CPAs but I hired a really good one this is a big New York City Law Firm big CPA and they looked over all my income and everything else and they said they started asking me questions like Ross this is crazy why aren't you doing this why aren you doing this why aren't you doing this now when I previously had sort of a small town local CPA he didn't ask any of those questions he I mean you know they just I don't think they think at that level they're just like oh here's the 1099 punch it punch it punch it all right boom here's the amount due next client so I heard this expression at one point that a good accountant is worth their weight in gold and you know I don't know how much my accountant weighs but based on the current price of gold and the millions of dollars that he's saved me in unnecessary tax payments by implementing some of these strategies I'd wager he might actually be worth his weight and gold so there are two techniques that that work to pay zero capital gains tax and so so the first one was my accountant said Ross um let's get real for a second you're paying a lot of tax this is kind of crazy we got to figure out a way to to to be more efficient how do you feel about moving to Puerto Rico and I said well wait a second moving to Puerto Rico you know my wife my my her family's all here my family's here um gosh he said you know I understand your family's here think about how you could pay for their plane tickets to come see you with the tax you're saving I said huh well that is a good point so I actually went to Puerto Rico I went to Puerto Rico to check it out tax strategy number one is act 60 in Puerto Rico act 60 is a um is a is a regulation in Puerto Rico that is an incentive to encourage uh us residents that live in the continental US well I guess any United State um to move to Puerto Rico and if you move to Puerto Rico you will have zero capital gain G taxes now there's a little bit of controversy around this because this is not something that Puerto Rican born and raised residents are eligible to take advantage of this is only for people that move to Puerto Rico it's a incentive designed to attract people to move to Puerto Rico and help boost up the economy there and it has it has been effective but you know it also for some people feels a bit unfair nonetheless this is basically your number one strategy because if you move to Puerto Rico you have to live there for 6 months and one day each year and if you do that your gains are 100% exempt you have zero capital gains taxes and now you know you can't just fake it you've got to actually be there for six months and the IRS does residency audits because if you're really not there you're only there on appearances then that's not going to fly anyone in the United States can move to PTO Rico and you're not giving up your US citizenship by the way because Puerto Rico is part of the United States so it's not really that different than moving to a different state within the US you're still US citizen you are just now a Puerto Rican resident like a New York resident or a Florida resident except you get all the tax benefits so you know if but if you're in a position where you would consider moving um it's an option so if we Dorado Beach is where a lot of these you know mega mega wealthy people live and I think Jake Paul the guy who just was fighting Mike Tyson he he's in Dorado Beach and so Dorado Beach on their website has all this information about act 60 d d and let's just look at the prices of homes at Dorado Beach you want to see how much they are this one's 42 million bucks 41 million 4 million 40 million 35 35 this is kind of insane it's crazy how ex I mean these are like Miami prices but the thing is there's enough people out there this is a three-bedroom three bath for 10 million it's a it's like a condo um so what I'm saying here is that there's a real high demand for this these types of properties among people who are very very wealthy and the people that are very wealthy that moov to Puerto Rico they want to be in these kind of gated communities they're insulated they have a lot of security they're super safe da da da and so Dorado Beach is one of the ones that's really popular this is the um is it the the Four Seasons at Dorado Beach I think it's the reserve Four Seasons Reserve um anyways doesn't matter so um so that's your first strategy so if you're interested in moving to Puerto Rico then uh you know go take a trip there I took a trip there you know I had no complaints really but it's just not uh realistic for me to move to Puerto Rico right now so uh tax strategy number two and this is the strategy that I've implemented day trading in a Roth IRA so if Puerto Rico is not going to work you can consider day trading in a Roth IRA if you trade in a Roth IRA all of the trading profits and the distributions are 100% taxfree the only hitch and there's a hitch with the first strategy which is that you have to move to Puerto Rico the hitch with this strategy is that you have to wait till you're 59 and a half years old to take those distributions out so that is a little bit of a it's a little bit of a bummer if you're on the younger side but all of the profit that you're making in that Roth IRA you're giving yourself as a huge gift for the future and here's the way I kind of thought about it if I take money out of the Roth IRA I will pay income tax on it and I will pay a penalty so you pay a penalty for doing an early uh distribution but what I thought was right now when I'm making millions of dollars trading my I'm in the top income bracket now this is going to sound like kind of a very silly problem but I think it's sort of interesting that I'm in the top bracket that I'd be in the same bracket as someone like Elon Musk I feel like there should be a little bit more a little bit more in between here because it doesn't feel quite equal that making like two or three million a year is going to put you at the same level as someone who's making 500 million or a billion or more anyways I digress nonetheless I figured that because right now I'm at a higher tax bracket I don't want to pay income tax on this profit so I'd rather trade in the Roth IRA but if in the future trading slowed down or for whatever reason you know I wasn't working I became retired at an early age then I would say you know I could take profit out of that Roth IRA and yes I'll pay tax on it but my income bracket will be lower so that's the thing they don't tax you at the bracket that you were at when you made the money they tax you at the bracket you're at when you take the distribution when you do the withdrawal so if I wait until I'm at a lower bracket to do a withdrawal that would be fine if I wait till 59 and half years old then I'll have zero income tax and I won't have a penalty so perfect world would be waiting until 592 years old to take a distribution but the next best thing would be waiting until you're in a lower income bracket setting up a Roth IRA all right this is how you do it so there's a couple things you need to know if you want to set up a Roth IRA the first issue is that there's a Max annual contribution limit of $7,000 that's current currently what it's at $7,000 it that changes each year every couple years it goes up a little bit with cost of living inflation but right now the most you can contribute is $7,000 so it'll take you a couple of years to contribute enough in order for the account to be maybe big enough that you can day trade in it because you would still be subject to the $25,000 PDT rule which is kind of a bummer but it is what it is now there's another issue with setting up a Roth IRA there's two types of IAS there's a traditional IRA and then there's the Roth IRA so what's the difference between these two uh Roth IRA with a Roth IRA your um your the growth is tax-free so no income tax on the growth and no income tax on the distributions however your contributions are post tax so let's say you make $100,000 you have $100,000 of income if you contribute with a traditional IRA and you do $7,000 it that amount actually comes off your tax so the government is encouraging you to make this contribution so your taxable income goes down to 93,000 but that's not true with a Roth IRA with a Roth IRA you you earn 100K you pay income tax on it and it's from your net after tax your your take-home pay that you make your contribution so the idea here is that with a Roth IRA you pay tax on your initial contribution but you don't have any income tax on the growth or the distributions whereas um on a traditional IRA you actually have no tax here you have no tax on the growth but you do have tax on the distributions so this is kind of a problem because let's say you make initially you know $70,000 in contributions over the course of 10 years let's just say and let's just say over the course of 30 years this grows to like $300,000 now you've got $300,000 and every time you take a distribution you're paying income tax on it it's kind of a bummer but you did get the tax benefit at the beginning of paying less income tax on your salary because it came off of your gross income so this is this idea is tax the seed not the tree so here we pay a tax on the seed the contribution and then everything it produces is taxfree here you have no tax on the seed but then you have taxes on all the distributions so this works a little bit better for the government and I think the reason that the Roth IRA was created was because it's a better option for people who don't make as much money that's why they created the income limits however they allow what's called a backdoor conversion it's literally called a backdoor conversion and it allows you to create and contribute to a traditional Roth IRA which is what I did and then at any time you can convert a traditional IRA to a Roth IRA you do a conversion so what happens when you do that conversion let's say you have $10,000 in the traditional Roth in the traditional IRA and you want to convert it to a Roth you would pay income tax on $110,000 so for that year your taxable gain would be whatever you made plus 10,000 which is related to the conversion so you'd pay income tax on the sort of initial contribution of that conversion and then you're in the Roth and you have no tax after that so if you can do direct contribution to a Roth that's ideal if you have to do the backdoor conversion you can do the backd door conversion there's a button on um in Charles Schwab where you click on your traditional IRA you click back do a backdoor conversion and then they just pull up the thing and it says you want to convert this and then you pay the tax it says this is how much you'll owe at the end of the year and then you do it and it's done so it's super easy now as I already mentioned if you want to day trade in a Roth IRA you are still subject to the PDT rule so the pattern day trader rule which states you need $25,000 higher or more cash in the account in order to day trade um but what's also interesting is that some so there's also a couple other things that that are important to know with the Ira so number one is you need the $25,000 PDT rule number two there's no leverage number three no shorting and I'll tell you why if you short a stock let's say you short a stock at 10 and it goes all the way to $1,000 a share that would be pretty crazy but if that happened you would have a margin call what's a margin call a margin call is when you have to add more money into your account because because you lost more than the balance of your account but we already have a $7,000 contribution Max each year so you're prohibited from adding more money to the account so since you wouldn't be able to meet the margin call the rule is that you're not allowed to short any stocks because you can't put yourself in a position where you could lose more than what is in your account so there's no shorting and there's no leverage so you can't trade on four times leverage in a retirement account because again if you took that big loss you'd have a margin call but some Brokers like Weeble allow you to trade in a IRA account but it's treated as a cash account so that means if you have $25,000 you could trade you know 10 times in that day a $2,500 position but then when you run out of cash you can't take any more trades till the next day but other Brokers allow what's called settlement margin settlement margin means you can day trade as much as you want so you take a trade you close it it settles basically instantly you take another instant instant instant so you can dat trade as much as you want but you don't get leverage so it's like Mo usually margin when you get margin you also get four times leverage and in the Roth IRA or a traditional IRA you get margin but you don't get leverage so you can day trade as much as you want but with no leverage so that's that's okay with me um and there's these three Brokers allow day trading in a Roth IRA or individual um traditional IRA and they offer settlement margin so light speed trading Charles Schwab and interactive brokers there may be others I'll say that I personally don't like interactive brokers at all that's not a broker that I like Charles Schwab don't love them but I know a lot of Traders use them I have an account there too light speed that's the account that I use every day it makes no difference to me what broker you sign up with I don't have any affiliate relationships with any of them I've used all three this was my worst experience I I just had problems constantly uh sometimes I couldn't sell positions they would flag it and not let you sell so they have rules on trading stocks I think it's under $5 where they'll block you from being able to sell if your Shares are more than the average volume of that stock over a set period of time and the problem is what we know about a lot of small cap stocks and I'll just give you an example of one from uh just the other day so this stock here just as an example traded on 68 million shares of volume uh or no 75 million shares of volume yesterday and then you know 2 days before that or 3 days before that it traded on like 30,000 shares so the average daily volume of this stock over this stretch was like 10,000 20,000 shares a day so if you trade to 10,000 shares you would have been 100% of the daily volume based on the daily average which is these past like 30 days uh and so they would say you can't sell your position without first compliance doing a review so then your account is kind of Frozen and then they let it through it's very strange so anyways um so that's something that um interactive brokers is the only broker I know of that does that but in any case so I wouldn't use them if you're trading small caps but if you're trading large caps it doesn't matter Tri Schwab and light speed are both fine for small caps so setting up a Roth IRA fairly straightforward you make your contribution and the way I did it is I did three years of contributions so one of the things that's kind of interesting is at any time you can do two years of contribution so like right now you can contribute for this year and you can contribute for next year and then in April you'll be able to contribute for the following year so you can always do basically two years to catch up at the same time and then you'd have to wait a year to do the third year so that's kind of the way I did it and that gave me uh $188,000 so I had $118,000 in contributions and I then grew that account so what is now let's see I've got um about a million right now in my active account and then I have about 7 million that I put away into a long-term Roth IRA so about $8 million zero income tax that's huge and that's all back from that $583 small account challenge so of all that profit I paid tax on the first couple years of trading profit before I knew about these strategies and then I set up the Roth IRA and I've been trading in that ever since so you know one of the things that I think is pretty amazing is that you can show up and work every single day trading in the market and all of that profit you make can go right into a retirement account if you were doing anything else you can't do that if you doing real estate investing I mean and I mean you could buy real real estate in a retirement account but it takes a lot of money you you to to get it to the level where you can make that deposit there's nothing really that you could do to grow a retirement account from 500 to you know 10,000 or 20 ,000 in as short of a period of time as a successful Trader could but of course that hinges on your ability to trade profitably so first things first focus on your strategy but once you've got the strategy dialed in setting up a Roth IRA makes a ton of sense all right so strategies number one and number two will completely eliminate any capital gains tax you move to Puerto Rico or you set up a Roth IRA you'll have zero capital gains tax so now let's talk about strategy number three strategy number three is going to be probably more um more popular for a lot of you guys who are saying well Ross I can't move to Puerto Rico and setting up a Roth IRA is nice but I need the money that I'm making from Trading to pay my bills today so strategy number three Trader tax status and Mark tomarket MTM accounting this allows you to maximize your deductions and it allows wash sales so rather than wash sales being disallowed and therefore sort of artificially increasing your taxable gain your wash sales are are allowed you essentially you don't have to deal with wash sales anymore so how does this work well we have in the in the federal tax code um a Trader tax status this is topic um section 429 Traders and securities and what they say is that if you are an if you are an eligible Trader and I'll tell you what that looks like then you can be cons you get a special there's special rules that apply to you and the trader tax status means that you can now deduct reasonable and necessary expenses related to producing that trading profit and that is a big deal because when you produce um capital gains and when you're just trading and you're getting a1099 from your broker if you are not considered uh to have Trader tax status then you can't write off any of the expenses related to producing that profit so when you have Trader tax status you can now deduct all of the reasonable and necessary expenses related to producing that profit so that could include your education cost so you become a warrior Pro member you subscribe to go to seminars you do something else your software costs you use scanners you use charts you use news feed you've got a computer equipment I mean let's start getting real here so Education costs I mean I mean look they can vary I've heard of places that charge $30,000 for trading education but let's just say you know $3,000 so $3,000 for trading education and then let's say software costs are you know your scanners 197 per month so times 12 so now you got $2,400 on the year for scanners let's say you also decide to subscribe to you know I don't know um one of these news Services it's $50 a month that's $600 a year let's say you also add had um level two data from your broker that's $100 a month so that's $1,200 a year so now all of a sudden you're totaling this out and you're like oh my gosh so I've got three I've got six s $7,200 in in expenses that's just on on that well what about you know your computer you buy a $1,500 computer so now you got $1,500 here on the computer you get a couple extra monitors that's 400 bucks all right so now you're coming up to what is this um 8700 um let's see 9100 $99,100 so I mean it's not a crazy amount of money but if you were in any other line of work if you are a plumber if you're a carpenter you would be itemizing every single one of those items that you purchased that are necessary and reasonable for conducting your business and you would deduct them against your total income that's what any other business owner would do trading is a business you have to treat it as such and that's where you become tax efficient you start thinking about this and realizing well wait a second what about my internet now for me I have the house that I have I there is actually s of two properties on one two houses on one so there's the house and then this is my office my office is separate from the house so all of the expenses related to maintaining this office that's deduction that these are my office expenses so I've got my heat over here I've got my electric over here now if you have one meter you've got to separate it with sort of square footage and stuff like that if you've got two meters and that makes it super easyy easy so you know you got to kind of work with your individual situation maybe you have a a a guest bedroom and that's your office now some people will do the standardized home office deduction based on um the the maximum allowed dollar per square foot other people will create a rental agreement where you essentially are you create a business that's renting space from you personally doesn't matter how you do it you should always talk with a CPA in case you didn't know I'm a day trader I'm not a CPA I'm sharing things with you that I've learned over the years but you should always consult with a CPA they're worth their weight in gold so it's it's definitely worth your time nonetheless you've got all these deductions that you can come up with you've got your internet provider office Rental Professional fees accounting fees you've got to hire a different accountant to you know review your trades but you should get a better accountant than what you might have just used otherwise and so all of this adds up so you know let's say right now we're at 9,000 but we didn't add the accounting fees the internet provider so let's just let's just say $122,000 a year just for the sake of you know keeping the numbers round now some of these um you may have to capitalize you know your furniture your desk stuff like that but nonetheless you have an account and they can kind of review it for you and so now you've got $112,000 in expenses so let's say you made $100,000 right now you deduct that off of what you made so now you're at 88,000 well let's say it goes the other way let's say you're read $100,000 that's not what I want to hear but let's just say that's what happens well you still have these costs of business so now you've got $112,000 that you're um in the red that year so you might as well make the most of the loss and make sure you're you're factoring it in right why not so in order to be eligible for trade or tax status you have to meet all of the following conditions you must seek to profit from daily Market movements in price of Securities and not from dividends interest or capital appreciation done we're day Traders you're activity must be substantial I'm day trading every day it is you must carry on the activity with continuity and regularity I am I think if you are showing up every day you are too the following facts and circumstances should be considered in determining if your activity um is a Securities trading business typical holding periods for Securities bought and sold is it less than is it day trading essentially are you day trading the frequency and dollar amount of your trades during the year the extent to which you pursu the activity to produce income for your livelihood and the amount of time you devote to the activity so you know these are the facts and circumstances so look there's going to be people that try to use the tax Trader status to take a bunch of deductions when they're really not active Traders so they create this um you know the this documentation or these rules and um everything to give you guidance to help you understand as a taxpayer the types of things an IRS agent might look at if you came under audit so while you can write off expenses related to trading you will continue to Face Wash sales if you only do the trader tax status so the only thing Trader tax status does is it it's you telling the IRS I trade Securities as a business and therefore I'm going to go ahead and deduct all of my necessary and reasonable expenses related to producing that income and that's great but you still have wash sales wash sales require you to do the marketto market change in accounting so the way this works is at the beginning of this episode I talked about the way wash sales work so a wash sale uh wash sales originated from investors who would sell positions at a loss in dece in December to take a tax loss against other gains and then they would buy back the same position in January so the IRS said no no no that's that's not going to work so if you buy back a substantially similar position within days you're disallowed from writing off the initial loss and the problem is disallowed wash sales have the result of increasing your taxable gain beyond the amount that you actually made which is crazy I mean in this this wasn't thought of that it would be an issue for day Traders but that's it's just what has happened so if you traded Apple every single day for an entire year then the problem is because you're trading the same stock again and again and again you would have all of these wash sale losses that are disallowed and then all of a sudden you get your $199 and it says you made a whole lot more than you actually made that's going to be a problem and like I said you can't go retroactively change this but you can change it moving forward so let's talk about what that looks like the Markt Market election will exempt you from wash sales and it does something else it allows you to write off all of the losses related to trading against other incomes in other words you're no longer limited to $3,000 of capital loss so if you have additional losses let so let's just say for instance um that you know we go back to this scenario over here where you were down $100,000 and then you had a 12,000 in expenses and let's say oops wrong color um doesn't matter so let's just say in this year um you're down 112,000 okay but you let's just say you made um 100,000 from other income all right so you your 100,000 is of profit off the 112 So this year you've got a loss of $12,000 so since you don't get you don't get money you know you don't get paid if you have a loss so your your taxable gain goes to zero for the year and this $112,000 you carry forward you get to carry that forward to next year right so many people talked about how Trump didn't pay tax for like a super long time and they said well it was because he had this huge Casino in Atlantic City or whatever it was that you know he closed and lost hundreds of millions of dollars on or whatever it was and he used as a carry forward loss so he just kept carrying it forward until he eventually used it up so he had no tax no tax no tax for years and years and years and you know some people said criticize that and he said I'm using the tax code the way it's written what's wrong with that this is a carry forward loss I had a big loss and now I get the other which was terrible but now I get the other side of it and so that's the same with with Markt Market accounting that's what um would have allowed that probably for him um but if because if you didn't have the marketto market accounting you'd be limited to only writing off $3,000 and this would be a problem because if you limited to only writing off 3,000 then you're 100,000 in income you've got $112,000 in losses well that's if you've got the trade or tax status and you're allowed to do the deduction here of your equipment um so but let's just say you have you would only be able to do $3,000 of it per year it's going to take you it's going to take you 30 years to to to fully use all of this loss which is crazy so what most day Traders are going to do is uh file for marketto Market accounting this is pretty logical so what happens when you file for Mark to Market accounting is that the trading profits become classified as ordinary income instead of capital gains and you will no longer have washed sales so you we apply for marketto Market accounting by filing form uh 3115 and notifying the IRS of our change in accounting method which is under Section 475 F at the next tax filing and here's the really important thing is that there is a deadline for filing your mark tomarket election it has to be filed by the tax due date April 15th but if that's on a Sunday then it's you know the 16th which is a Monday whatever um it's it's due by the tax day of the tax year in question so if you want to have Mark tomarket accounting you can't let's just say it's like October or whatever if you filed it in October the IRS won't accept it for that tax year it's too it's too late so you can only do it for the next tax year coming up but if you do it in December that's fine then you could have it ready to go for January because Mark to Market accounting is not retroactive it begins from the time you file so you file you notify your broker that you have filed and what the broker does is they change your tax report on their back end so they say oh this client is no longer going to have wash sales that's exempt they are now a mark tomarket taxpayer so then your $199 at the end of the year will be correct this is a problem because there's people that file the 3115 Mark to Market election uh with the IRS but then they don't notify their broker so the broker doesn't know you've changed and they send you a $199 that's going to show a gain that's higher because it's has wash sales disallowed so you've got to make sure that you file this form you notify the IRS when you file your next taxes you can file the form and then file the taxes that's fine but then you have to make sure you also notify your broker and you should always do this with a CPA so I'm just sharing with I didn't do this myself I had the CPA do it for me and you should do the same you should consult a CPA on this but this was what made sense for me now there are are some downsides with being on marketto Market um accounting which is that if you're trading longterm in that account it's going to mess up the capital gains um so you're not going to have long-term capital gains anymore in that account because it's all treated as ordinary income so you need to be able to separate your day trading from your long-term investing and you should consult a CPA to see if there's any other um downsides that you should be aware of there weren't any others that I recall so tax strategy number three was to make sure you qualify for Trader tax status which anyone who's an active Trader should and then that allows you to do all your deductions related to the expenses for producing the income and then number two is to file from Mark to Market accounting so your wash sales are exempt so by doing that right there you're reducing your taxable income you've reduced it by taking the deductions for the expenses and your income won't be artificially inflated from wash sales are disallowed tax strategy number four is day trading as a business now day trading as a business requires that you have already done Trader tax status and that for the business you do Markt Market accounting so you could do Mark tomarket accounting for you individually and you can also do it for a um LLC or uh that's registered um to be taxed as an sorp or as a C Corp that's done an S corp election so and that's what most people are going to do is either an LLC with um es Corp status or a C Corp with es Corp election the es Corp well I'll tell you about that in a second so when you're day trading as a business um this gives you all the benefits of the trader tax status that we already because you should already do that you're going to have no wash sales and additionally it allows contributions to a solo 401K of up to $69,000 a year now when you do the $69,000 a year in contributions those are it's a it's it's a traditional 401K so those would come off of your income so $23,000 is you 23,000 23,000 is your employer match so that brings you up to $46,000 and then your employer can do profit sharing of up to 25% of your salary um to a cap of well it would bring it up to $69,000 so I guess it's a addition an additional um 2023 so yeah so so that's the um that's the employee employer profit sharing so your max contribution would be $669,000 but it would require a slightly higher salary uh Additionally you will be able to deduct um health insurance premiums through your business and if you put yourself on a payroll at the business then you can pay yourself a reasonable salary and then you can also take distributions from the business which are at a lower tax rate than um than a W2 wage so creating an LLC or a corporation is kind of the final stepping stone for a lot of Traders now naturally you don't have to do any of this if you just mooved to Puerto Rico right make your life simple go to Puerto Rico you don't have to do any of this if you do a Roth IRA but with a Roth IRA you can't touch the money till you're 59 and a half years old without a penalty and paying tax so number three of course Trader tax status and Mark to Market accounting number four is going ahead and creating a business for yourself so taking it to that level saying this is a business I'm running it like a business so I'm going to incorporate a business so creating an LLC or Corporation now you want it you want these to be an LLC is already a pass through entity which means if you create an LLC the LLC doesn't pay taxes and then you pay additional taxes you don't have double taxation with an LLC uh all of the income of the LLC goes goes straight onto your own tax return as the member of the LLC so really the only thing an LLC does is it provides asset protection it protects the assets that are inside the LLC so God forbid you know you got into an accident and you were considered at fault and you get sued for like a million dollars or something like that happens um then your assets that are inside the LLC would be protected and so that's they're limited liability companies so they limit the liability and and that's sort of the benefit there where you've got some protection over that uh so a lot of people will create an LLC um for asset protection purposes it it by itself doesn't really change the the tax because you know if all the income was the same you're still take making the same amount of money you're still taking your same standard deductions um so it doesn't do a lot for that but one thing that is nice about an LLC or a corporation and if you do a Corporation you want to do an ESC Corp because an es Corp means um all the income from the corporation passes down to the shareholders so again it's a pass through entity so an LLC with an S elction or a corporation with the S elction by opening these corporations and then opening a bank account and a credit card for the business it's very easy to segregate all of the income related to the business into these business accounts so anytime you're subscribing to something like stock scanners or charts you're using your company credit card you know anytime you're uh paying for an accountant you're writing a check from the company account and then at the end of the year you've got all your statements from the company account it's very easy to keep track this is this is how it all totals out right now you can a lot of banks um and you know QuickBooks a lot of banks and like American Express credit cards allow you to directly import reports into like a QuickBooks and then you just do the import you print it out and now it's not only got all of your expenses there it's even grouped them based on like dues and subscriptions and professional fees and you know everything else that's you know that's kind of like in its category so it makes it super super easy it's a lot easier than putting everything on your personal card and then having to keep copies of every receipt you know and be like wait where's it's just easier in my opinion to have them separated so being able to segregate and deduct all business expenses on the separate card and bank account to me is a big plus um and then you one of the things that's nice is um excess profits um tax excess profits and you can contribute into a 401k so this is where we've got that $69,000 limit with the employer match so now you're able to reduce your taxable gain by contributing into a 401k so that again is the government encouraging you to save for retirement encouraging your employer which is you in this case to help employees save for retirement and so now you've got the limit of $69,000 a year that you can deduct against your income now this is when you deduct let's let's say you made $500,000 and you're deducting $69,000 for the 401K now if you're doing that that is deducted against your income but remember that $669,000 it's deferring the income in a sense because now it's in your 401k over here and it's going to grow and eventually you know it grows to a million dollars or whatever and then when you take the distributions you're going to have tax on it so it's not as great as doing a Roth IRA but it gives you the short-term benefit of reducing your taxable gain so now let's say here you've got um let let's just move the number a little higher let's say you've got $21,000 in deductions from equipment and everything else so now you're at 70 8090 so you've brought your income here from 500 down to uh 410 right just by uh doing the 401K and the deductions and of course not having wash sales so this right here has saved you $90,000 that's awesome right now that's just a start there's more that you could do but this is a great starting point so if you had excess profit at the end of the year and of course you're the company's going to have to pay you a wage um which is very easy to set up so it pays you a salary you take that salary but let's just say the company has um excess profit of $100,000 at the very end of it you've already covered your cost of living you've got $100,000 you're like shoot if I do this I'm I I've already maxed this out I can't don't have any more deductions I can take is there anything I can spend $100,000 on that is a deductible expense and that's where if you get a good CPA they're going to start giving you suggestions they're going to say well wait a second you know there's an investment tax credit if you buy a solar farm you could buy a $100,000 solar farm you get bonus depreciation on the whole thing now you just brought your income all the way down to zero and you own a solar farm and that solar farm is going to pay you dividends of income every year for the next 30 Years right so solar Farms are really popular because the investment tax credit there's other Investments that people like for the bonus depreciation gas stations um trailer parks because it's um the the way the Improvement is the Capital Improvements you've got storage facilities so now you start having people that are producing profit and rather than just saying oh I've got an extra $100,000 so I guess I'm going to lose 40 of that or 30 of that to tax they say well if I invest it in these certain government approved and sponsored investment classes I get an additional benefit so this is the government subsidizing regular investors going and investing in solar or you know these different things that are deemed necessary and your your accountant is going to know about all those things because they're dealing with this every year every every month they're dealing with it they're trying to help their clients make smart Investments that help reduce their taxable gains so now all of a sudden you do this for a few years and you know one year you do a solar farm another year you invest in you know an RV park or something like that in your area another year you invest in self storage and you know by the end of five years you've built up your 401k you've built up some investments in things that generate some passive income yes the income that they produce will will generate income on your returns but then you keep taking that income seeing what your balance is at the end of the year after your W2 and everything else and cost of living and you take it to keep rolling it forward and this is how the top 1% of Traders are growing their net worth some of them are moving to Puerto Rico some of them are trading in a Roth IRA some of them are trading in a business account and they're growing their business now I'm a big Advocate that at the end of the year if you've got $100,000 in profits what you probably should have done was at some point in the year start trading in a Roth IRA because if you're making more money than you really need to need for covering your cost of living then anything above and beyond switch to the Roth IRA so I think at a minimum even if you say I need to really make profit to cover cost of living you should open a Roth IRA anyways make your max max contribution that you can afford or that is allowed whichever is the case and just plan that maybe one day a week you trade in it or you know maybe you one once you get to that point of the Year where you've covered your cost of living for the rest of the year you trade in it however you want to do it maybe it's time of day your first three trades are main account next trades are in the retirement doesn't matter how you slice it up it whatever works for you but it makes a lot of sense to get that Roth IRA growing because that is the most logical answer for most us Traders set up the Roth IRA and and just have it on the side so you could be growing that account tax-free but this really is how Americans um are growing going from sixf figure Traders growing their net worth making smart Investments being more tax efficient it's not all about being more profitable if you're more tax efficient than the next person I also am am a big believer that if early on in your career you can save as much of your profit as possible I mean I know when I first got started my goal of $200 a day wasn't leaving a lot of room for saving but then all of a sudden you know I scaled up really quickly and was like whoa $300,000 a year $400,000 year $500,000 a million a year and I know the problem for a lot of Traders at the end of that year they make their first million dollars and then they realize they owe $300,000 in tax or 350 depending on what state they're in right and it's like a huge tax bill and the and what's worse is that sometimes Traders by the time they realize what their tax bill is come April 15th they may have even lost some of the money that they made but you know by by December by you know those first three months they took losses so it it you have to be doing this tax planning you've got to build a relationship with a good CPA that understands trading and you know you've just got to really treat this like a business these are some of the strategies I've learned from some of the best CPAs in the country I've implemented um all of them except for moving to Puerto Rico moving to Puerto Rico is the only one I haven't done yet maybe I'll do that in the future but for right now I kind of found the sweet spot for me you've got to find the sweet spot for yourself and I want to thank you as always for tuning in this episode if you enjoyed it I hope you hit that thumbs up I hope you subscribe to the channel and I'll see you for the next upload real soon [Music]