Trader Tax Return and Sch C deductions

[sam]

If you trade a lot, have you claimed Trader Tax Status (TTS) with Sch C filing? In case those who don't know,

There is no filing required with most states for a TTS sole proprietorship.

There isn’t a tax election for claiming TTS. — it’s determined based on facts and assessed at year-end (such as Volume of trades, Frequency and Holding period).

Traders don’t have revenue on Schedule C; report trading gains and losses on other tax forms and Schedule C losses are an above-the-line deduction from gross income.

Basically (with TTS) all it does it claim expenses on Sch. C as business expense like subscription fees, market data fees, margin interest, equipment like computers and home office deduction ( these can be big like proportion rate size of your office to your total home size (e.g 20% of mortgage, property tax, electricity and internet and even phone) etc.

Once you are Trader, then perhaps next levels are 475 election (mark to market) take care of Wash sales

Next level is either LLP (such as husband and wife entity) or S corp. Entity will help to make 401K and health care expenses but with entity you have make payroll to you and pay taxes on it but in most case you likely will come out ahead due to tax deductible contribution to 401k and healthcare expenses.

I have quite a bit of trades, almost daily with profits for the year. I am thinking of using it. Just curious if any one has done it?  I have read Trader tax status expense deduction is invitation to Audit and not sure how much it will cost to defend Audit (as it defeat the purpose, tax deduction savings will to go some CPA or lawyer's pockets)!

Q: Does Turbo Tax premier lets you or guide you with Sch C forms? or does it forces you to buy TT home and business edition? For me it is good size deduction.

[anitya]

In regular business Schedule C reporting, healthcare premiums are above the line deduction. Why do you need an entity to get the same deduction in Trader Tax Status?

For most retirees not on Medicare, HC premiums are one of the largest recurring expenses.

[sam]

I did not know Health care premium deduction goes on on Sch C as I have never used Sch C. I went to seminar where presenter was promoting entity formation (and his CPA firm services) for traders and benefits of entity. Health care premium deduction was listed under entity vs Sch C (Trader Tax Status) deduction.

[anitya]

sam ,

when I had a business, HC premium deductions were on page 1 of Form 1040 (not on Schedule C per se but by virtue of having a business). Forms change all the time and so I could not tell where the deduction is shown on the current tax return. Just to be clear, irrespective of entity status, my question was, what is the nuance in Trader status that allows you all the deductions allowed for a regular business but not HC premiums? If you do not know the answer, do not worry.

If a business person is buying supplemental insurance while on Medicare, presumably that is a HC premium they can deduct too.

I will wait for the traders in this forum to get to the bottom.

[sam]

My understanding for business for tax purpose

If you have a business it better have entity (C corp, LLC or LLP). Lets say you own apartment complex but then ownership should be within LLC or LLP. BTW most people buy real estate with LLC to protect from liability of real estate (remember Condo complex fell to ground in Miami Beach) or protect real estate from your own other liability e.g you had a motor accident and you want to protect real estate ( I think it helps if it is with LLC).


Now if you are managing real estate then you can deduct health insurance expenses to claim real estate as business.

Same logic is behind trading under your own name or trading via LLC or LLP or S corp account where you can deduct Health care expenses.


For Traders there is something in between which is Trader Tax Status. My understanding is (via from that person selling Entity formation business for Traders) only few things can ONLY be done via Entity either C corp (bad idea for traders, or LLP or LLC or LLC with S corp election. These few things are Health and Dental care expense deduction and contributions to 401K and again with entity you have to give your self pay check and pay both employer and employee portion of FICA taxes.

[sam]

Apr 17, 2023 16:45:13 GMT sam said:

I did not know Health care premium deduction goes on on Sch C as I have never used Sch C. I went to seminar where presenter was promoting entity formation (and his CPA firm services) for traders and benefits of entity. Health care premium deduction was listed under entity vs Sch C (Trader Tax Status) deduction.

That answer I found on web

"Problem for Sole Proprietor Traders

Sole proprietor traders have one limitation. You are only permitted to deduct as much health insurance premiums as you earn from your trading as reported on Schedule C. If your business does not make a profit, there is no deduction. The IRS classifies gains from security trades as unearned income. If a sole proprietor trader makes a profit (net trading gains less schedule C expenses), they still can’t take the health insurance deduction because their business has no earned income. "

Short answer is Earned Income vs Non earned income. Trading income is unearned under your name (without entity) and you need earned income to deduct Health care Premiums and pay your self a pay check.

[sam]

THis is I found via web search

www.keepertax.com/tax-write-offs/trader

thismatter.com/money/tax/securities-trading-business-taxation.htm

[sam]

Any one, no one trade on these forums not even Uuncleharley?

[Capital]

I am not a trader nor do I want that status. My understanding is that when you have trader status all stock positions become inventory and gains and loses are reported on Schedule C. You lose your capital gains treatment. I will stick with Investor status. I wish you good luck.

[sam]

Apr 19, 2023 9:14:59 GMT Capital said:

I am not a trader nor do I want that status. My understanding is that when you have trader status all stock positions become inventory and gains and loses are reported on Schedule C. You lose your capital gains treatment. I will stick with Investor status. I wish you good luck.

I don't want to get in argument with you. These 2 slightly different things.

You need to have mark to market election (again this is choice not a requirement) for all gains to be treated as ordinary income and NO wash sales rules

[Capital]

sam I see what you are saying. I don't qualify to be a Trader. Good luck.