Save Taxes, Keep the IRS Off Your Trading Company and/or Hedge Fund

02/17/2008 12:00 am EST


Robert Green, CPA


Robert Green, CEO, explained how claiming trader business status and filing as an entity can minimize your taxes…

Green told attendees that few traders know that claiming business status for their trades can serve them very well, when it comes to paying taxes.

He noted that the IRS is back in business with a vengeance, and they don’t really understand trading like they do investing. However, if you present your return properly, you can minimize your chances of being audited.

Green told attendees that the catalyst that launched his tax business was in 1997, when Congress said IRC 475, mark-to-market accounting, applies to traders—not investors—allowing business traders to deduct their losses.

Investors are only permitted restricted expenses, such as home office and education, but have a 2% floor, plus the Alternative Minimum Tax, and many of their expenses never make it to their tax returns. But a business trader has many advantages, including more generous expense deductions and net operating loss carry backs, and their exemption from self-employment taxes.

Green listed some of the qualifications for claiming trader business status, including:

  • Must be a full-time trader, trading more than four hours every day

  • 500 round turn trades annually

  • Initiate a lot of day and swing trades instead of holding positions for months

  • Have the intention of running a business and act accordingly with your record keeping

  • Have significant tools of the trade, including a computer and home office

He discussed specific tax treatments as well as applicable tax codes for futures, forex, and equities traders. Green also told traders that filing as an entity has distinct advantages, and he shared the pros and cons of alternative entity types.

In closing, Green recommended that traders use a good CPA or accountant to help them decide their most favored tax status and reminded them that keeping good records, via a decent industry software program, will greatly help them maximize their tax savings.

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