The Best Way to Handle Your Taxes

Editor's note: Day traders have some unique needs when tax time rolls around. In this series of stories, which runs through Monday, TSC tax reporter Tracy Byrnes, with some help from TSC contributing editor Gary B. Smith, guides traders through the maze. Be sure to read the introduction to the series, and join Byrnes and trader tax expert Ted Tesser for a Yahoo! chat Tuesday at 5 p.m. EST.

As part of TSC's series on taxes, the editors were nice enough to ask how I, Mr. Trader, go about handling my taxes. And, you know, they were probably expecting about 2,000 or 3,000 words on my detailed and sophisticated strategies. How I had memorized the federal and state tax codes and integrated the latest tax rulings into my methodology. How I had devised a spreadsheet that instantly notified me of any holdings that qualified as capital gains. And finally, how I had developed such an expertise on taxes that I had made it the centerpiece of my entire methodology.

Well, they were wrong. They came to the wrong guy. In fact, they came to one trader who knows so little about taxes he doesn't even know the correct forms to fill out come April 15.

On the other hand, they came to the right guy if you want to know how I think you should handle your taxes. Or, more appropriately, how not to handle your taxes. That's right -- I do almost nothing come tax time, except one thing: I let my accountant know how much I made.

Yes, I'm nothing if not consistent, and as usual I stick to my overriding life methodology: KISS.

You see, I learned a long time ago that I could be good at maybe three or four things. Really good at maybe two things. If I tried to do everything well myself, I'd be suboptimizing my overall performance. (See, I did go to business school!) On the other hand, I learned that if I delegated to experts in each area, I would improve not only my personal productivity, but also my overall performance and productivity. I just had to "let go."

Now, for a lot of you, that's not easy -- you're veritable one-man bands, doing everything from your own buys and sells directly to market makers, to writing your own software code, to filling out your own alternative tax tables.

But if I learned one thing from my years at IBM (IBM Quote), it's this: It's usually more productive and less stressful to hand off the baton. In that regard, my sole focus in the tax arena has been to develop and nurture a good relationship with my accountant.

So that's my focus in the area of taxes. Many years ago, I found someone whom I liked and trusted. A bright guy, he's helped me set up a subchapter S corporation, as well as my current LLC. Equally important, as I've grown as a trader, he's grown as a trader's accountant.

It is he who has studied all the applicable tax laws concerning what I can and cannot do as a trader, what things I can write off as expenses and different strategies I might employ to shield my income. He is the expert on how taxes affect me. That's his job. Mine is to become the best trader I can be.

Now, does this cost me a few bucks? Of course. But I figure that's more than made up by the overall dollar savings of having an expert handle this complicated area. Plus, I can't begin to compute the time savings from not having to struggle through form after form every year.

Of course, you can make the entire process a bit easier by being organized on your end. I suppose I could just dump my confirmation statements in an envelope and have my accountant figure everything out, but there's no need for that.

No, by simply updating your trading records every day, the entire reporting process goes a lot smoother. In my recent Saturday column, a number of readers weighed in with suggestions on record-keeping software. I on the other hand use a simple spreadsheet, which I've attached.

Click here for spreadsheet

And for day traders making hundreds of trades per day, I believe, many of those "direct connect" brokerages keep a record of your trades automatically.

No matter what you use, though, if you keep current on updating your trades, then tax time is easy: Just print your results and email it to your accountant.

Keep in mind that 99.9% of my trades qualify as ordinary income. But if most of your trades qualify as capital gains or even a mix of both, this is easy to notate on your spreadsheet. The only thing you might want to do is bone up on your Excel knowledge if you go the homegrown spreadsheet route.

It really boils down to this: Delegate this tax stuff to an expert. Find a great accountant and make him or her your partner. Your job is to keep organized. Their job is to do the rest. Bottom line: KISS.