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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28294
Experience:  Taxes, Immigration, Labor Relations
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I buy and sell commodity futures. Is there any kind of

Customer Question

I buy and sell commodity futures. Is there any kind of deductions or allowances that can be taken on profits? How can I pay the least amount of tax?
Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

First of all - if that is your investment activity - your taxable income is a capital gain that is the difference between purchase and selling price. Fees to buy or sell are added to the cost of the property.

When we are looking for deductions - these must be actual expenses.

For investment activity - it might be investment interest if you borrow the money,

and other expenses of producing income. You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). To be deductible, these expenses must be ordinary and necessary expenses paid or incurred:

--To produce or collect income, or

--To manage property held for producing income.

The expenses must be directly related to the income or income-producing property, and the income must be taxable to you.

The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income.

These include fees you pay to a broker, bank, trustee, or similar agent to collect investment income.

You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments.

You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents.

So your actual deductions are mainly base on what expenses you actually paid.

Customer: replied 11 months ago.
Is there any way I can tie my investing into a business so that I can get all the business deductions from my investing?
Expert:  Lev replied 11 months ago.

Yes - that is possible - but there will be another side - your business income will be subject to both - income and self-employment tax. Because of that and some other aspects - it might not be always beneficial from tax prospective.

.

There are some categories of those dealing with securities

- Investors typically buy and sell securities and expect income from dividends, interest, or capital appreciation. They buy and sell these securities and hold them for personal investment; they are not conducting a trade or business.

- Dealers purchase, hold, and sell securities to their customers in the ordinary course of their trade or business. Sometimes they maintain an inventory. Dealers are distinguished from investors and traders because they have customers and derive their income from marketing securities for sale to customers. Section 475 requires dealers to keep and maintain records that clearly identify securities held for personal gain versus those held for use in their business activity. Dealers must report gains and losses associated with dispositions of securities by using the mark-to-market rules.

- if you are a trader in securities, in the business of buying and selling securities for your own account. The law considers this to be a business, even though a trader does not maintain an inventory and does not have customers. To be engaged in business as a trader in securities, you must meet all of the following conditions:

  • You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
  • Your activity must be substantial; and
  • You must carry on the activity with continuity and regularity.

Traders report their business expenses on Form 1040, Schedule C, Profit or Loss From Business. The Schedule A limitations on investment interest expense, which apply to investors, do not apply to interest paid or incurred in a trading business. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss upon disposition of the securities .

Expert:  Lev replied 11 months ago.

It is important to note that in general, late section 475(f) elections are not allowed.

After making the election to change to the mark-to-market method of accounting, you must change your method of accounting for securities under Revenue Procedure 2015-14.

In addition to making the election, you will also be required to file a Form 3115, Application for Change in Accounting Method.

Specifically - see IRS publication 550

https://www.irs.gov/pub/irs-pdf/p550.pdf

Page 70 Special Rules for Traders in Securities.

.

Please be aware that if you make the mark-to-market election for 2016, you must file a statement with your timely filed return for 2015.

That is important to note that the mark-to-market election may be only revoked with a special permission from the IRS.

So - it is recommended to have an LLC and making such election for the LLC - thus if you will need to revoke it in future - you may simply close the LLC and not dealing with the IRS.

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