Capital Gains and Losses

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I have just started trading stocks and was referred to a…

I have just started trading...
I have just started trading stocks and was referred to a company that specializes in tax and entity strategies for stock traders. They recommend various entities that offer benefits like wash sales disregarded, ability to write off expenses like trading software and so on, the ability to fund retirement accounts through the entity and so on. At this stage I don't know whether or not my trading venture will be profitable or not. So my questions are:1) I'm sure an entity, with all the set up expenses that entails only makes sense once the trades is PROFITABLE (ie: not losing money)?
2) Let's say in 2018 I trade stocks as an individual and start making profits then I can always form the trading strategy DOWN THE TRACK (for example in 2019)? In other words.. I don't need to carry on as I started?
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Answered in 14 minutes by:
11/20/2017
Chad EA, CDFA®, CFP®
Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional
Category: Capital Gains and Losses
Satisfied Customers: 2,620
Experience: IRS Licensed Enrolled Agent, CDFA ® CFP ®, MBA
Verified

Hello Howard,

According to the IRS, "trading" is not automatically deemed a business activity. Generally, all income from trading is considered unearned, or passive, income. Unless an individual can qualify for trader status or forms a separate legal entity for trading purposes he or she will be treated as any other tax filing individual.

1) If you are in business to make a profit and qualified as a trader then you would be able to deduct ordinary and necessary business expenses even if your company is not profitable.

The company you are referring to may also specialize in helping you become a qualified as a trader or assist you in forming an separate trading entity.

2) If you decide to start trading now as an individual and then decided to become qualified as a trader, then in 2019 or at any time in 2018 you may form a trading business.

How the IRS Defines a Trader
In IRS Publication 550 and Revenue Procedure 99-17, the IRS has set out general guidelines that provide guidance as to the activities that qualify trading as a business. To be engaged in a business as a trader in securities, a person must trade on a full-time basis, and derive most of his or her income through day trading. According to the IRS, a trader is someone who trades significantly and continuously in order to profit from the short-term fluctuations in security prices.

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I would be happy to answer any follow up questions you may have!

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Customer reply replied 8 months ago
Thank you, so:1) I probably don't need to worry about trading as a business or form a trading entity until / if I am PROFITABLE?2) I don't believe an S-Corp is an ideal entity, but for the purposes of helping me learn..I can trade as an individual person who is not qualified as a trader during 2018 and then if I'm profitable in 2018 I could form an entity in 2019 and switch to that?

1) As of now, if you are learning the trade of trading, then I wouldn't be concerned with the business structure.

Forming an LLC will generally result in you being taxed in the same manner as if you traded without forming an LLC. The LLC will limit your liability, but with trading your liability is already limited to what you invest. Creating a trading budget and staying within that budget is more of a concern when traders start out.

2) You can definitely trade as an individual and then if you find yourself trading full time and a S Corp may be ideal then form an S Corp. You can switch at anytime if you feel you fit the requirements of being a trader. You are able to form a S Corp in most states in under a week.

Chad EA, CDFA®, CFP®
Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional
Category: Capital Gains and Losses
Satisfied Customers: 2,620
Experience: IRS Licensed Enrolled Agent, CDFA ® CFP ®, MBA
Verified
Chad EA, CDFA®, CFP® and 87 other Capital Gains and Losses Specialists are ready to help you
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Thank you for the rating !

Good luck and please let me know if you have any further questions.

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