Tracy Byrnes and Ted Tesser chatted about tax tips for traders on Yahoo!, Jan. 26 at 5 p.m. EST.

TSCEllen:

Hello everyone and welcome to today's tax chat with TheStreet.com's Tracy Byrnes and tax expert Ted Tesser! Tracy and Ted will be talking about all tax issues today with an eye towards taxes for traders. For more information about TSC chats, please send email to chats@thestreet.com. And make sure to check out the Tax Forum every Saturday at www.TheStreet.com. Keep those questions coming we'll begin in a few minutes!

TSCtracy

: Hey everyone! Welcome to our chat for trades and their tax issues!

TSCtracy

: Ted Tesser is with us today.

Ted_Tesser

: Hi everybody glad to be here Yes I am in Boca Raton

TSCtracy

: Ted is a CPA in Boca Raton, FL and is one of the few guys out there that actually understands these crazy trader tax laws

TSCtracy

: and he's an active day trader to boot So bring on the questions. Ted's ready for the challenge

Ted_Tesser

: I'm ready Tracy

TSCtracy

: Just to start, can you reiterate the self-employment tax issue when a trader elects to mark to market his trades?

Ted_Tesser

: Tracy, this is a question that you and I have addressed in your column several times The tax law is now quite clear on this issue Ted_Tesser of self employment tax for traders marking their positions to market The original bill did not tell us what to do but in the technical corrections act they clarified it and stated unequivocally "that trading income would not be considered self employment income if it were put on Sch C only for the reason of maring to market the positions under section 475

TSCtracy

: there it is - the definitive word!

Ted_Tesser

: It was further reiterated that Congress intended this to be so In their Blue Book report which was put out by Senator Bill Archer and William Roth of Delaware They again said this was not subject to self employment tax Anybody who wants to read the report can find this on Page 181 of the Blue Book so the secret is out

TSCtracy

: Thanks for all that info! OK, so now we're going to dive into your questions?

MG1963

asks: In your book, you say to put expenses on Sch C. In NJ, you cannot have losses on Sch C - it's just $0. Is there a way around this?

TSCtracy

: NJ doesn't recognize Sch C losses unfortunately

Ted_Tesser

: People may elect section 475 if they have profits which is marked to market and in this way deduct their expenses dollar for dollar against trading income

TSCtracy

: So that means if I'm a trader with losses in NJ, what can I do?

Ted_Tesser

: Move to Florida, Texas, New Hampshire, Washington State Alaska and any other tax free state

TSCtracy

: thanks!

hkbiii

asks: Could you expand a bit about the main pros and cons of "mark to market" election, and the wash sale rule "benefit"?

Ted_Tesser

: Yes The pros of marking to market are as follows you do not have to worry at all about Wash Sale Rules You have a much greater ease in preparing your tax return as you do not have to worry so much about individual trades as you do about changes in equity from beginning of year to end of year And, you generate ordinary non self employment Sch C income for the purpose of creating a VEBA and other related reasons such as we just addressed of generating The disadvantages are that if you trade commodities you lose a sch C profit rather than a loss the long term gain treatment

platypus1776

asks: According to your article I am a Trader, can I expense Health Insurance Premiums and medical expenses on Schedule C?

TSCtracy

: health insurance has come up a ton - this is a great question

Ted_Tesser

: This is an area that I have gotten a change in answer recently from the IRS. It is not recommended that you deduct medical insurance against income as the income is not self-employment income

TSCtracy

: But that's just a recommendation?

Ted_Tesser

: It is actually pretty clear that it is not allowed above the line but rather should be an itemized deduction It is "self employed health insurance" and this is not self employment income

TSCtracy

: What type itemized deduction?

Ted_Tesser

: It is a medical expense

Cranford99

asks: I claim Daytrader status for my taxes. Sorry if this sounds dumb, but why would I be better off if I formed a company? Thanks

TSCtracy

: good question

Ted_Tesser

: A company has several advantages First of all as a corp you are a small fish in a big pond That will make you less likely to be audited Also, you can decide to set up a retirement plan in a corp, but never as a sch c

TSCtracy

: Am I likely to be audited if I elect trader status as an individual?

Ted_Tesser

: and finally if you elect mark to market in the corp you can then decide to trade outside the corporation as a non mark to market entity

Ted_Tesser

: It has been my experience that you are no more likely to be audited just for electing trader status Although, the more activity you have and the more gross proceeds you have that chance may increase

vhehn

asks: Ted, what is the latest info for ideas on trading tax free.in a regular account not a retirement account

TSCtracy

: or what about trading in my tax deferred account?

Ted_Tesser

: It is always good to defer any gain in a tax-deferred acct

gatertrader

asks: Why can I have a part time profitable business and deduct all expenses, but if it is a part time trading business that is profitable, I am not able to claim trader status?

Ted_Tesser

: No body ever stated for certain that you have to trade full time

mar7ge

asks: Are option traders treated the same as day traders? I derived 2/3 of my income from my option trading. Balance was withdrawal of capital. I retired in late 1997 at age 56 and intend to support myself by trading options.

Ted_Tesser

: Different types of options are taxed differently so you have to check on the specifics of each

TSCtracy

: but if you trade options can you elect trader status?

Ted_Tesser

: Trading options actually is a favorable factor for a trader

perchoice

asks: as a trader can you have long-term investment accounts

Ted_Tesser

: You can have long term investment accts as a trader although they are not considered part of your trading

TSCtracy

: you must keep separate accounts

FroggyGirl2000

asks: Do daytraders have the same wash sales rules as investors?

TSCtracy

: yep!

CHRIS_IN_CALI

asks: IS THERE ANY POSSIBLE WAY TO UTILIZE A SELF EMPLOYED AS A TRADER STATUS TO CUT TAXES?

Ted_Tesser

: You can generate self employment income through a corp and use it to do a retirement plan

tjg_ltfff

asks: If a trader reports profit loss on sch C is he required to have a business license

Ted_Tesser

: No They are not subject to the limitations of retirement plans and can be used to build up tax deferred equities We are now talking about vebas which are tremendous tax shelters

buckarooboo

asks: Is a Roth the no brainer IRA of choice for a 27 year old?

Ted_Tesser

: A Roth IRA is a good start. but you can only put $2,000.

lookin2retire

asks: Does the exclusion from self-employment tax only apply if you mark to market?

Ted_Tesser

There is no self employment income for traders unless you own or lease a seat on an exchange...PERIOD!

platypus1776

asks: Since I'm a Trader I have no Earned Income, can my Parents open IRA's(Roth, Traditional, Education) for my children and/or myself? What are the limits on that?

Ted_Tesser

: To set up a Roth IRA, the person needs earned income. An education IRA can be set up for the children

gatertrader

asks: What is my risk if I trade part time, but claim Trader status when I file my return?

Ted_Tesser

: It depends on many other factors. They must be evaluated in total. You can get a questionnaire if you email me

sdmary98

asks: why list profession as day trader when filing tax return do you pay less for short term returns

Ted_Tesser

: The tax advantage is mostly in deducting expenses but you can also set up a veba or retirement plan if you trade in a corporation

pfoshee

asks: Can you qualify if retired with good retirement income?

Ted_Tesser

: You may be able to qualify if you only trade your retirement plan but, the risk is that they may disqualify the plan as you can not run a business in one

mcharca

asks: Would collecting unemployment negatively impact the ability to consider oneself a full time trader?

Ted_Tesser

: No, but trading may be hazardous to collecting unemployment

annek13

asks: In my last life I was a MarketMaker. I am very used to buy/sell...buy/sell... What is a sec 475(f) trader and is that the ONLY way to circumvent the wash sale rule??

Ted_Tesser

: Sec 475 F now allows you to report your gains or losses as a market maker would without the self employment tax of a market maker

hkbiii

asks: If I "Trade for a Living", should I seriously consider forming an LLC as opposed to being a Self-Proprietor?

Ted_Tesser

: Also, no wash sale as a market maker would not have An LLC is good but for most people a sub S corp is simpler any entity is better than sole proprietor

TSCtracy

: Check out the piece TSC did on LLC's vs. S-Corps

NYCSKATER

asks: Do daytraders living in NYC need to file the NYC Unincorporated Business Tax Return if they are a sole proprietorship?

Ted_Tesser

: YES unless they incorporate

vhehn

asks: would you change a regular IRA to a ROTH for trading

Ted_Tesser

: You can convert but not spread your tax out anymore The difference is with a Roth, you don't pay tax when you take it out.

TSCtracy

: But the rules for trading within an IRA vs. a Roth are the same, no?

Ted_Tesser

: Yes

gatertrader

asks: If I have a full time trading business, stop for 6 months and then resume, what would be the best way to handle that on my tax return?

Ted_Tesser

: This is a difficult questions. They have disallowed in a recent decision someone -Paoli, who only traded part of the year rather than throughout the whole year

TSCtracy

: Paoli is the court case

MG1963

asks: Instead of putting trading expenses on Sch C, can't I just adjust my cost basis on Sch D? It gives the same net effect and eliminates Sch C - since the IRS has nothing written in stone, is it wrong?

Ted_Tesser

: That's not the way to do it Nice try!

razordad

asks: Can the entire amt. of a stock that became worthless be deducted?

Ted_Tesser

: Yes. And there is no objective criteria

pashaa

asks: I have a general business corporation and my brokerage account is set up for the company, but all I do is trade stocks. Can I claim a trader status on my return?

sdmary98

asks: what books or articles have you written

Ted_Tesser

: We have a whole line of books, videos, and other products available

Ted_Tesser

: You should keep your businesses separate

TSCtracy

: I told you -- Ted was one of the few guys out there who has a clue about this stuff!

Ted_Tesser

: for traders If you like email me for a product list

rwpslb

asks: What is the specific statutory authority that provides that a person who qualifies as a trader is not subject to self-employment tax on profits? I cannot find an answer to this question in either section 475 or 1402(a)(3) of the IRC:

Ted_Tesser

: The Technical Corrections Act states this fact:

berky295

asks: Ted has the IRS recently taken any traders to court who try to avoid self employment tax on trading income.

Ted_Tesser

: The main issues that have come to court in recent years are traders who try to deduct more than $3,000 net loss prior to Sect 475

vhehn

asks: Ted they said you were a trader too what do you trade

Ted_Tesser

: I trade the S& P bonds and mutual funds on a daily basis And hedge my positions with OEX Options

Tipsytrader

asks: Sch C is EARNED income, not ORDINARY income, how do you identify to the IRS that your MTM income is not subject to "social security" tax?

Ted_Tesser

: You indicate on either the sch c or sch se that this income is not subject to self employment tax

borb44

asks: Ted, you saved me thousands with your 1995 book. Does your 1997 book enable me to write off ALL my losses against retirement/dividend income?

Ted_Tesser

: We actually have a new book out called The Trader's Solution

TSCtracy

: Hey - he's a tax guy, not a magician!

Ted_Tesser

: available this year which goes into all the tax breaks of the 97 Act Email me for the details

tjg_ltfff

asks: 75% net worth Investor, 25% full time trader. Two Sch D's or combine on one?

Ted_Tesser

: One Sch D as the income is initially reported as capital gain for both

pfoshee

asks: 1997, had a big gain daytrading did not file as Trader, all capitol gain - 1998 lost about 40% of that amount, can I qualify as a Trader for 1998? And recover taxes paid?

Ted_Tesser

: If you qualify as a trader and mark to market you can carry back the loss and get back some of your money

vhehn

asks: Ted, I've talked to you about my taxes. This series gives my the confidence to do my own return.are'nt you afraid you will lose business? .lol

Ted_Tesser

: In my opinion, anyone filing as a trader and doing his own taxes is the same as a heart patient performing open heart surgery on himself Neither one is recommended

czerangue

asks: Ted, do I have to itemize all of my trades out, or can I just show net p&l and then keep records in case of audit?

Ted_Tesser

: It is in fact, preferred that you only provide summaries

perchoice

asks: what is veba?

Ted_Tesser

: A veba stands for Voluntary Employee Benefit Association It is a way for a business owner- a trader to set up a deductible benefit program for himself through the business If done properly, you can deduct an unlimited amount of benefits for yourself to have build up tax deferred in the future Email me for details

lookin2retire

asks: Are you saying that if I have done my day-trading in the same account as my long term investments that I cannot report the earnings as we have discussed, mark to market and avoid the self-employment tax? Even if I have kept good records?

Ted_Tesser

: That is not what I'm saying The IRS is very big on segregation of accounts and it would be better to do it that way

Ideliver2

asks: does the 31 day wash rule affect daytraders?

Ted_Tesser

: It is actually a 30-day rule

TSCtracy

: here's the url for a big piece we did on it:href="http://www.thestreet.com/funds/taxforum/585107.html" target="_blank">www.thestreet.com/funds/taxforum/585107.html

Ted_Tesser

: and we have covered it in detail in past columns

czerangue

asks: This is my first year filing while trading was my only occupation. I was driving 300 miles a day to day trade at an office in New Orleans. Can I deduct that mileage?

TSCtracy

: no, it's a commuting cost.

Ted_Tesser

: No

tjg_ltfff

asks: Ted, WA state Sec. Lic. Div. says if a trader operates as a business, he is required to have a securities dealer license. What's that all about?

Ted_Tesser

: That may be a local ordinance Make sure they understand the difference between trader and market maker

Cranford99

asks: Ted, what is your Email address?

TSCtracy

: Be sure to check out TSC series on Taxes for Traders

Ted_Tesser

: tbtesser@aol.com

TSCtracy

: here's the URL:http://www.thestreet.com/funds/taxes/668476.html And remember to send any other trading questions on to taxforum@thestreet.com

TSCEllen

: Thanks Ted and Tracy!

Ted_Tesser

: Nice being here Hope to see you again soon!

TSCtracy

: Ted, thanks so much for helping us attempt to tackle these really complicated issues! And for those of you still confused about whether you qualify as a trader... email Ted for his questionnaire!

TSCEllen

: Make sure to look for this transcript in Talk TSC at www.thestreet.com. It's FREE! Also, if you would like more info on TSC chat events, send email to chats@thestreet.com.