Avoiding Business Taxes

The best way to take advantage of your newfound ability to generate a living income or a substantial amount of income is to set up yourself as a Limited Liability Corporation (LLC)

• Sole Proprietorships offer you the ability to get started quickly with minimal effort and no ongoing fees

• We want to set up a Limited Liability Corporation (LLC) and file your taxes as a S-Corporation

• Both statuses offer the ability to hire employees, but S-Corporations offers protection along with the same tax benefits

• Downside to being a business is having to pay quarterly taxes on your estimated gains each quarter; but you will get back money at the end of year if you overpay

LLC (S-Corporation)

• Benefits/Tax Deductions

  • • Click the link above to see most of the deductible benefits of a LLC (see below for the deductions that make having a LLC worthwhile)

    • Business liability is only to the business and not your personal assets like a sole proprietor

    • Ease to transfer business, to pass on to your children, or to bring on new partners

• List of Business Deductions

  • • 25 Tax Deductions for a Small Business

    • LLC Expenses Cheat Sheet: Tax Deductions

    • Do's and Don'ts of Tax Deductions

This is an accounting method that allows us to take full advantage of our trading efforts in good and bad times. Based on your level of success trading will determine whether this method is the best for your trading style.

Typical Taxes on Trading

• There are two main rules that all traders, non-business entities, follow when trading: Wash Rule, Maximum net capital loss in any tax year is $3,000

• Wash Rule

  • • The wash sale rule prohibits an investor from taking a tax deduction if they sell an investment at a loss and repurchase the same investment, or a substantially identical one, within 30 days before or after the sale.

    • Because it includes the day you sell your investment, it actually works out to a full 61 days that you (or even your spouse or a corporation you control) cannot buy an investment that is the same or similar enough in the eyes of the IRS. Otherwise, your transaction may be considered a wash sale, leaving you unable to claim any of the losses you realized.

    • This is intended to prohibit bad faith investors from using temporary dips in an investment’s value to secure a tax break and then turning around and repurchasing the same investment to lock in a potentially better cost basis on which all future taxes on gains will be calculated.

• Maximum net capital loss in any tax year is $3,000

  • • The IRS allows you to deduct from your taxable income a capital loss, for example, from a stock or other investment that has lost money. Here are the ground rules:

• An investment loss has to be realized. In other words, you need to have sold your stock to claim a deduction. You can’t simply write off losses because the stock is worth less than when you bought it.

• You can deduct your loss against capital gains. Any taxable capital gain – an investment gain – realized in that tax year can be offset with a capital loss. If your losses exceed your gains, you have a net loss.

• Your net losses offset ordinary income. No capital gains? Your claimed capital losses will come off your taxable income, reducing your tax bill.

• Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).

• Any unused capital losses are rolled over to future years. If you exceed the $3,000 threshold for a given year, don’t worry. You can claim the loss in future years or use it to offset future gains, and the losses do not expire.

• You can reduce any amount of taxable capital gains as long as you have gross losses to offset them. For example, if you have a $20,000 loss and a $16,000 gain, you can claim the maximum deduction of $3,000 on this year’s taxes, and the remaining $1,000 loss in a future year. Again, for any year the maximum allowed net loss is $3,000.

• The last day to realize a loss for the current calendar year is the final trading day of the year. That day might be December 31, but it may be earlier, depending on the calendar.

Mark to Market Method of Accounting

• By taking the MTM method of accounting, this eliminates the Wash Rule and the Maximum net capital loss in any tax year is $3,000

• You can now claim all losses regardless of repurchasing in to the same security within 61 days

• Instead of being limited to $3,000, all transactions are treated like revenue and expenses to your business and all are accounted for in the given year

  • • Typical taxation: $16,000 revenue. $15,000 losses

      • • $13,000 taxed, $12,000 in losses rolled to the next 4 years ($3000 - first year, $3,000 second year....)

    • MTM Taxation: $16,000 revenue. $15,000 losses

      • • $1,000 in gains; $1,000 taxed on gains

        • Still taxed against your personal tax bracket (including other income you made from a job)

• This is a HUGE advantage to traders who may often fluctuate in their first years of trading or in unforeseen markets that can have your investments take a sharp turn

• Downsides

  • • Paperwork, compliance, annual fees (which are deductible)

    • With MTM you lose out on Long Term Capital Gains Taxation where you could pay as low as 0% or as high as 20% (0%, 15%, 20%)

    • The ability to use long term capital gains taxation can save a lot of money for long term investors

    • Consider taking your long term strategies as your personal investing and only using short term strategies for your LLC to take advantage of both tax benefits