Booyah Breakdown: Taxes for Traders II

On the other hand, you don't qualify for a Keogh, a retirement plan that covers self-employed people, and you don't pay into the Social Security system, so you're on your own for retirement.

Deducting Expenses

Whether you elect mark to market or not, there is another big bonus to trader status. Your trading-related expenses are considered ordinary business expenses and are 100% deductible on Schedule C. In fact, you can take the standard deduction and still deduct all your trading expenses on Schedule C. Pretty cool.

Ordinary investors can deduct expenses (with all their other miscellaneous itemized deductions) only in excess of 2% of their adjusted gross incomes.

There are also other perks to reporting expenses on Schedule C:

• You can take a deduction of up to $108,000 for the full price of any new Section 179 property you purchased that same tax year. Any computer, business machine, fax or phone used in your business can also qualify. This is not available to investors.
• Any investment interest expense related to your trading business is 100% deductible as a normal business expense on Schedule C. For investors, this expense is deductible to the extent of investment income and is reported on Schedule A -- itemized deductions.
• You can take a home office deduction for your trading activity. An investor cannot. In fact, traders should take the deduction as a way of proving their trader status. That means filing Form 8829 -- expenses for business use of your home.

Here's a list of some more deductible trading expenses:

• Accounting fees
• Books, tapes and video courses on investing
• Calculators or adding machines
• Costs of collecting interest and dividends
• Tax advice
• Home computers and software
• Data-retrieval services
• Interest expenses
• Legal fees
• Salaries
• Subscriptions
• Home office deductions

It's important to make sure you don't try to deduct nontrader expenses. If, for instance, you use TheStreet.com for your trading and investing accounts, the cost of the subscription should be allocated between the two. The IRS will take notice if it feels the allocations are off. So keep a record of the amount of time you spend on each account.

What About Investors?

If you do not qualify for trader status, you are an investor. That means expenses related to your investing activities will be considered "investment expenses." They will go on Schedule A as miscellaneous deductions.