Tracy Byrnes and Ted Tesser Chat on Yahoo!

Tracy Byrnes and Ted Tesser chatted on Yahoo! on Tuesday, Sep. 21, at 5 p.m. EDT. As with all chats, this transcript is unedited.

laura_the_street: Welcome to TheStreet.com's chat with Ted Tesser and Tracy Byrnes.

TSCtracy: Hey there all. The deadline is here! No more procrastinating! And I know many of you traders out there have done just that! Before we jump in to your questions... let me first introduce Ted.

TSCtracy: He is our end-all be-all source on taxes for traders! So before we start, Ted, can you fill us in on what's new and different in the trader's tax world?

tax_trader_tsc: Hello everybody. The big news is traders can now deduct more than 3,000 per year in losses if they elect 475.

TSCtracy: Great - has the IRS created a form yet to help us out with this election?

tax_trader_tsc: They have a form, 3115, for making the election that you file with your tax return. What they still have not told us is what form to file with your extension to tell them that you will be electing 475

TSCtracy: So if I don't file with my tax return, I can't make the election, right?

tax_trader_tsc: For 1999, you have already missed the deadline because it must have been elected with the first extension of the 1998 tax return. However, if you still have not filed 1998, and have an extension, you can elect on 1998 with the return and then the 1999 return.

TSCtracy: I gotta tell you - the IRS did a terrible job letting people know about these crazy rules

vuhank asks: Futures traders use a different IRS form, how do you write off expenses such as trading seminars and travels associated with the trips?

tax_trader_tsc: If you are a trader, not an investor, you take your expenses on Sch c even though you file a 6781 to report income.

barry_99_uk asks: What Capital Gains allowance are we allowed per annum?

TSCtracy: you mean for losses, right?

tax_trader_tsc: You are only allowed $3,000 as either a trader or an investor unless as a trader you elect Sect 475, then you can write off an unlimited amount of loss

TSCtracy: But don't forget that the rules to qualify for trader status are really tough.

TSCtracy: Check out TSC Taxes for Traders series for more detail.

Big_Daddycorp asks: How does income from insurance claims affect my taxes?

tax_trader_tsc: If you collected insurance for a personal injury it is generally not taxable if the insurance is to replace property, which you have written off as a casualty loss you would need to report it.

TSCtracy: what about those of us that are collecting thanks to Hurricane Floyd?

tax_trader_tsc: You would first offset your damages and chances are that would be more than you collect.

realcyberdoc asks: Mr. Tesser, Somebody told me that you claim traders can deduct investment expenses on Schedule C, but claim any income on Sched D, as Capital Gains, thus deducting all expenses but avoiding Self Employement Tax on any gains. Did you really say that?

tax_trader_tsc: No, I never said you can deduct investment expenses on Sch C. What Ii said is that you can deduct trading expenses on Sch C.

TSCtracy: There's a big difference there.

tax_trader_tsc: The income for traders always goes on Sch D unless you elect 475 and then it goes on Sch C with your expenses. Regardless of whether you put the income on Sch D or C, there is no self-employment tax due from net income from trading unless you own or lease a seat on a national exchange.

TSCtracy: It's important that you keep your investment and trading expenses separate - investment expense on Sch A, trading on Sch C.

shelburnet asks: Please explain the process of adding a loss to the purchase price of the same stock within 30 days and how that is shown on the tax return. Also, does the lot sizes have to be the same to do this? The tricky part of the return is the wash-sale rule. Is there any software that can automatically account for this once you feed in your daily reports? rule?

TSCtracy: For the basics on the wash sale - check it out.

tax_trader_tsc: The only time you really have a wash sale consideration is if you have open positions at year end or positions which you have sold within 30 days of year end and then bought back those same positions within 30 days of the sale.

tax_trader_tsc: As far as different lot sizes go, you would have to match up the lot sizes sold with the amount you bought back. You would simply carry the basis forward and add or subject the gain or loss until you clear the stock after a sale for 30 days. Also, keep in mind, if you elect 475, there is no wash sale consideration ever.

TSCtracy: And I don't know of any software that will configure the wash sale for you. Do you Ted?

tax_trader_tsc: No.

mlorge asks: If you are a trader, can you shelter gains through the creation of a KEOUGH or SEP?

TSCtracy: If you create one - I'll bet you can retire early.

tax_trader_tsc: The answer to that is yes and no

TSCtracy: Actually this is a really hot issue with our readers

tax_trader_tsc: If you already have a Keough and SEP, you can set up a trading account within them. However, there are certain caveats that need to be addressed.

TSCtracy: But Ted, as we've discussed before, can you claim trader status?

tax_trader_tsc: You can

TSCtracy: but....

tax_trader_tsc: However, you run the risk of the government looking at your retirement account as a business and then disallowing the retirement account since you cannot run a business in a retirement account.

TSCtracy: That's assuming you do not trade in any other account, right?

tax_trader_tsc: That's only if you trade your retirement account.

drediedc asks: What do I need to do to call my trading a business to deduct expenses and losses? Is it too late to be able to do this for 1999? Do I need to incorporate and get an occupational license locally? Where can I get a complete discussion or "how to"?

TSCtracy: First - check out the taxes for trader series for more grist on qualifying for trading status.

tax_trader_tsc: It is not too late for 1999 to be classified a trader the only thing that is too late is to elect 475 if you have not done so for 1998.

perchoice asks: What would be the pros and cons if a trader opens an llc vs staying as an individual in n.y.?

tax_trader_tsc: I can address the llc issue in broad terms. In NY, there are certain statues as far as public disclosure that need to be met that may be more involved than other jurisdictions.

TSCtracy: You need to get a local accountant for that.

tax_trader_tsc: The main advantage of an llc is that you can set up a retirement account from trading income by drawing a salary to yourself which you cannot do in a Sch c. Also, it is better to file in the pool of corporations, or partnerships when you have large gross proceeds. This will make you a smaller fish in a big pond.

TSCtracy: Love that analogy.

hkbiii asks: What significant rules or laws are affecting "Trader Status" for the upcoming tax year?

tax_trader_tsc: As I mentioned, the big consideration now is whether to elect 475 or not. There have not been any significant tax court cases, in the last year or 2. However, congress and the committee that wrote the Blue Book-Interpreting type new law did explicitly mention that trader status does exist.

TSCtracy: That's a big score for traders

tax_trader_tsc: And although they did not tell you the criteria, they did tell you that they were specifically addressing that concern in this law. Hence, Sect 475.

tax_trader_tsc: This was a big deal because they now said You can be a business without outside customers. The first time this was ever put into law.

TSCtracy: What's mad ethem finally decide to acknowledge traders?

tax_trader_tsc: A brief moment of insanity

TSCtracy: That's what I thought

bluejum asks: Ted, I read your book five years ago. Has it been updated since?

tax_trader_tsc: Yes we have a new book out now which is the revised edition of the original book. We also have a new book coming out in late Dec called The Trader's Tax Solution, which is the first all new book since the original.

perky403 asks: Will taxes that were cut from my retirement be refundable ?

tax_trader_tsc: If you mean the mandatory withholding, it will be applied to your tax on your return.

TSCtracy: Anything new with the QQQ?

tax_trader_tsc: NO, nothing new.

calmerone1953 asks: Mr. Tesser, what is your opinion on vebas as a retirement tool? I have heard that they are the best to shield a large amount of money from tax and weigh the deduction and contribution towards the principals in the firm.

TSCtracy: Great question. Ted loves these things

tax_trader_tsc: VEBAs are a specific form of the 419 B welfare benefit trust. They are a little known tax shelter which Congress has been trying to close down for the past 50 years but they have not been successful.

TSCtracy: So hurry up and do it!

tax_trader_tsc: They are useful for putting away much more money and deducting it then in a retirement account.

mlorge asks: What if you don't trade your retirement account, but just want to take gains and put them in a SEP or Keough and therefore not have to pay taxes on those gains?

tax_trader_tsc: It is very useful especially if you are actively trading an account to have it be in a tax deferred account. The only problem comes about when you start deducting business expenses against it as if it were a business.

TSCtracy: Here's a sticky one for you: what if I sell in my taxable account and buy the same security back in my tax deferred? wash sale?

tax_trader_tsc: Nope. That is a very good strategy.

TSCtracy: Why thank you.

tax_trader_tsc: For people who have losses on stock and think the stock will come back but want to take the gain in a tax deferred account.

TSCtracy: I can't believe the IRS hasn't caught on to this yet, though.

tax_trader_tsc: The retirement account is actually treated as another entity, so no wash sale.

TSCtracy: You heard it hear first!

TSCtracy: The wash sale gets really tricky....

perchoice asks: If you transfer gains to sch c, how can you avoid the irs computers from thinking that your sch c net income is subject to se tax?

TSCtracy: How about this: if you transfer gains to schedule C... How do can you stop the IRS' system from thinking you should be hit with SE tax?

tax_trader_tsc: There are 3 ways that we let them know that the income is not subject to SE tax. The first is that all income is first entered on Sch D so that we tie out to the 1099B. Then, we back it off the Sch D with a negative entry and a note which explains what we are doing and why the income is not subject to SE tax.

TSCtracy: For a pictorial presentation of all this, check out this link: www.thestreet.com/basics/tradertaxes/716334.html

tax_trader_tsc: Third of all when the income is placed on the Sch C there is a box to check to indicate the income is not subject to SE tax.

fwlam asks: I've read most of your tax-related material on TSC and find it very helpful. Thanks! My question is: I've been trading full-time since April of this year, and plan to file my tax return declaring my status as a trader. I will probably end up marking to market the positions in my trading account as of Dec 31. If I stop being a trader to pursue another job, and close the account, transferring the funds to another brokerage account, will I have to continue to mark-to-market?

TSCtracy: Glad to help!

tax_trader_tsc: If you have not already elected 475, you will not be able to this year. But if you have already and you are grandfathered in once you stop trading you will not have to continue to mark your positions to market.

tax_trader_tsc: In fact, while you are trading there are certain things that you can do such as segregating non-475 securities in a separate account to indicate that you are not going to trade them and not mark them to market

karl_44141 asks: The IRS wants me to sign an extension for my audit since I plan to appeal their findings. Am I obligated to do so? Pros / Cons?

TSCtracy: Audit! ugh!

tax_trader_tsc: First of all, if you want them to be fair with you and give your case due consideration they will require you to file an extension of the statute.

TSCtracy: Read: just play the game.

tax_trader_tsc: In fact, appeals will not take a case without a statute extension because it often takes them a year or more to review an appeal. What you never should do however, is to sign a blank extension giving them as much time as they want. Always put a limit of either 6 months or a year on the extension before you sign it.

Bearish_123 asks: How much taxes will I have to pay on 3,000 dollars made from penny stocks? Would it be legal to hide it from the IRS?

tax_trader_tsc: It depends. If this is all your income, probably nothing.

TSCtracy: "legal to hide from the IRS" - sounds like an oxymoron to me

tax_trader_tsc: If you are in a very high tax bracket and the gain is short term, you will pay up to 39.6%.

TSCtracy: Do people actually make money off of penny stocks?

tax_trader_tsc: Not the people who buy them!

TSCtracy: that's what I thought.

Trady_Lady asks: Could you please distinguish between trading and investment expenses?

tax_trader_tsc: Trading expenses are exactly the same as investing expenses only they are generated by a trader not an investor and they go on Sch C not Sch A.

TSCtracy: It all depends on whether you are an investor or a trader

tax_trader_tsc: For more details, on the specifics, and requirements of trader status read this: www.thestreet.com/basics/tradertaxes/716325.html

frazzier asks: As an investor I pay no ss tax, as a trader I would?

tax_trader_tsc: Not unless you own or lease a seat on a national exchange.

TSCtracy: Remember, you don't pay SE tax - so that means you're not paying into the SS system

mat3676 asks: I assume you can be a trader if you fit the requirements without filing the 725 or whatever the form is called. Is that a correct assumption?

TSCtracy: 475 you mean.

tax_trader_tsc: You can be a trader with the only form requirement being a Sch C.

bluejum asks: So no FICA deductions as a trader?

tax_trader_tsc: No FICA deductions as a trader unless you own or lease a seat on a national exchange.

TSCtracy: Sorry.

paultweston asks: I already have a SubS corp for software development and trading (own account). Can the corp file for 475 election or should I consider taking trading entirely outside the corp?

tax_trader_tsc: The correct way to handle this is to isolate your trading to a separate entity.

TSCtracy: That's a standard rule for day traders.

tax_trader_tsc: Especially if you are going to elect 475

TSCtracy: Keep it all separate Ted.

TSCtracy: What if I have a "day job" but still actively trade? Can I qualify as a trader?

tax_trader_tsc: There has never been a case on the books which has come out and said you must be only a trader. However, it is much easier to prove that case to the IRS if you do trade exclusively.

TSCtracy: So your documentation is key here.

tax_trader_tsc: If you meet all the other qualifications, specifically large numbers of short term trades on a frequent, regular and continuous basis and you put the time into your trading business, there is nothing that says you cannot qualify. However, everything else should fall into place very nicely and you should keep a trading log of your activity.

TSCtracy: because truthfully - there are many people out there that hold down 2 jobs, this would be a similar situation, right?

tax_trader_tsc: Yes, but the requirements are much stricter to qualify as a trader if you have another job.

barky4 asks: My broker rebates commissions if I make enough trades - does this go on sched D, as increase to capital gains?

TSCtracy: Who's your broker?

tax_trader_tsc: I would probably put it on Sch D as a reduction in brokerage commissions and an increase in capital gains.

barky4 asks: Can you have an llc for trading and also trade as an individual on sched c?

tax_trader_tsc: Yes you can.

roysc asks: Could you suggest a source of tax info for foreign traders with US accounts.

TSCtracy: Read the Global Tax Forum! We've addressed these issues before! And will continue to do so.

bluejum asks: Besides income, any other differences in Sch C unique to trading?

tax_trader_tsc: The income is generally not subject to SE tax. Most Sch C is.

hkbiii asks: If one trades for a living, what is the biggest advantage (&disadvantage?) of incorporating, etc.?

tax_trader_tsc: Simialr to trading in a LLC, you become a small fish in a big pond. Also, you have the ability to elect sect 475 without it impacting your individual tax return. This is also a big advantage with regard to the time table for electing Sect 475.

tax_trader_tsc: If you start a Corp this year you will not have had to extend a prior year and so you have until the date you file your first return to elect 475. This could work in your favor because you will not have to commit to this election until after you see if you have losses.

TSCtracy: Why haven't you mentioned S-corps at all?

tax_trader_tsc: No one asked me about them.

TSCtracy: Thank god for me.

tax_trader_tsc: I will say this, if you trade in a corp, and you do not elect 475, it better be an S corp. The reason for this is that if you have a C Corp and only have trading income.

tax_trader_tsc: It will be classified as a personal holding company and subject to a surtax. If you elect 475, it does not matter.

TSCtracy: But what's the big difference b/t an S-corp and LLC for traders, Ted?

tax_trader_tsc: There is very little difference since both vehicles can be flow-through entities.

TSCtracy: That means you pay tax on everything.

tax_trader_tsc: The big advantage over a Sub S is that an LLC can be owned by virtually any other entity and by virtually any number of entities but a Sub S has strict limitations

TSCtracy: Are you and LLC or an S-Corp?

tax_trader_tsc: Both.

tax_trader_tsc: I have some businesses as S Corps and some as LLCs

tax_trader_tsc: You need to fit the entity to the type of activity and overall structure as to your business situation.

TSCtracy: Kind of like a good pair of shoes.

tax_trader_tsc: There is no cookie cutter approach.

calmerone1953 asks: Mr. Tesser, Did you recently go through an IRS audit? What was the outcome?

tax_trader_tsc: Yes, after doing this for 25 years I finally got hit myself

TSCtracy: really?! Why?

tax_trader_tsc: It was amazing to me that it took the IRS so long to check me out!

TSCtracy: But what was their reasoning?

tax_trader_tsc: I used every technique on my return that I have been teaching others for the past 25 years and naturally when I got the notice I figured they were after me.

tax_trader_tsc: However, after a full audit, of my entire return I received a NO CHANGE.

TSCtracy: YEAH!

tax_trader_tsc: And in fact, they ended up owing me money!

TSCtracy: Love that.

tax_trader_tsc: Which I settled with them by telling them they could keep it!

TSCtracy: How do you respond to the notion that people think you're being very aggressive - tax wise?

TSCtracy: People write in to me and tell me that their accountants say this is all untrue.

tax_trader_tsc: Well, what's up is that most accountants are too busy filling out forms to have time to formulate deductions.

TSCtracy: That's why I left the profession!

tax_trader_tsc: In my opinion that is the most important thing that a CPA can do for his clients. Anybody can go down to the IRS office and have their tax return prepared by one of their preparers.

TSCtracy: But with the plethora of info out there - how is a little ol' CPA supposed to keep up?

tax_trader_tsc: A CPA is a specialist, much like a DR who specializes in heart surgery.

tax_trader_tsc: I would not go to a general physician to have a triple bypass. With CPAs it is the same.

TSCtracy: But how do people find CPAs that specialize in this trader madness?

tax_trader_tsc: They should read the street.com.

TSCtracy: Yeah boy!

TSCtracy: Don't forget - Ted has a free questionnaire to help you determine whether you are a trader at all. Email him a [e-mail] and for any other tax questions, send them on to me and I'll hunt down the pros, [e-mail]

laura_the_street: Thanks Ted and Tracy your expertise is appreciated!

TSCtracy: Hey Ted - thanks for all this!

tax_trader_tsc: You are welcome. Glad to be here!

TSCtracy: It's been great and very informative - - as usual! Good luck out there to all you traders and don't forget - the drop-dead-deadline for your 1998 tax return in Oct 15.

TSCtracy: Ciao!

laura_the_street: Thanks for joining us today.