The trader tax status (TTS) constitutes the treatment of business expenses and offers several significant tax advantages to qualified active traders. The first step is to determine eligibility. If you are eligible for the TTS, you can request certain tax exemptions in good time, such as managing business expenses after the fact and the choice and fixing of other exemptions, such as Article 475 MTM and employee retirement.
Commercial expenses include start-ups, real estate expenses, household expenses, organizational expenses, interest margin, seminars, education, automatically created trading systems, section 179 (100%) or 100% of depreciation bonuses, amortization of software, market, securities lending rates and many more. The new TCJA tax law has suspended "certain detailed deductions subject to the 2% limit", including commissions and investment expenses, since 2018.
Trader tax status securities agents should consider a suitable choice of the standard treatment of earnings in section 475, which expires April 15, 2020, for individuals and March 15, 2020, for existing businesses or S-Corps. It exempts securities transactions from the loss of sale of laundry room adjustments and limits the capital loss by $ 3,000. Four hundred seventy-five profitable traders can deduct 20% of qualified business income (QBI), while QBI excludes capital gains and losses.
An S-Corp TTS unlocks deductions for health insurance premiums and highly deductible pension plan contributions. If a trader is not eligible for the TTS, he/she will not be entitled to any of these tax benefits.
It is not easy to qualify for TTS. At present, there is no legal law with objective evidence of admissibility. Subjective jurisprudence applies a test in two parts:
• Taxpayers' commercial activity must be substantial, regular, frequent, and continuous.
• A taxpayer should try to detect changes in daily market movements and take advantage of these changes in the short term, rather than benefit from long term investments.
Volume, frequency, and retention period are the "big three" because they are more accessible for IRS verification.
• Volume: It is recommended, on average, four operations per day, four days per week, sixteen operations per week, sixty per month, and seven hundred and twenty per year. Count each opening and closing operation separately, not the return. Entry and exit also count.
• Frequency: Perform operations approximately four days a week, with a rate of 75%.
• Retention Period: The IRS stated that the average retention period should be 31 days or less. It is a clear line test. They trade full-time or part-time, most of the day, most of the day when the markets are open. Part-time operators and loss of money are subject to greater control by the IRS, and individuals are subject to greater control than entity operators.
• Hours: You spend more than four hours a day, almost every day of marketing working in your business, it's always important.
• Avoid sporadic bankruptcy: a trader has no intermittent business failures during the year.
• Intent: You will run a business and make a living. It doesn't have to be your main life.
• Operations: Have large sales, education, sales, and office teams.
• Account size: it has the size of the hardware account. Securities dealers must have deposited $ 25,000 with an American broker. Obtain the status of "professional employer" (PDT). For the minimum account size, we would like to see more than $ 15,000.
Do not consider these four types of companies for the TTS qualification.
• Hire a fund manager: Hiring a registered investment advisor (RIA) or commodity trading advisor (CTA), duly registered or exempt from registration, to change accounts does not take into account the qualification of TTS.
• Automatic trading systems developed externally: A digital commerce service (ATS) with little or no commercial participation cannot benefit from TTS. But, if the trader can be very involved in the creation of ATS, can write code or algorithms, configure input and output signals and only deliver execution to the program, the IRS can count the ATS generated in the TTS analysis.
• Negotiation of pension funds: Get TTS by trading taxable accounts. Trader activity in non-taxable pension accounts does not take into account the TTS rating.
• Trader copy service: Some traders use "trader copy software" (TCS). Trader copying is similar to using a preserved TTY or an external consultant, where the photocopier cannot benefit from TTS in these exchanges.
Advanced Accounting & Tax Planning