Thanks for your many responses to our Taxes for Traders series. Nearly 200 questions came in, so we've put together this special, midweek Tax Forum to answer some of them.
We selected issues that came up repeatedly. But if we missed anything, please let us know. Send your questions to
email@example.com, and please include your full name.
Never-ending Quicken Saga
A few weeks ago, a spokesperson from
Nasdaq Powers Past Record High Amid Bond Market Lull; Tesla Extends Gains
With investors content to buy into Fed Chairman Jerome Powell's inflation optimism, bond markets are holding steady and stocks are looking to test fresh record highs.
told us that the program "was not designed" to handle short sales or margin accounts. But readers
Andrew J. Kese
all wrote in to say that Quicken handles their short sales just fine.
"I can enter them like any other trade, and a little window pops up at the end that says 'entering a short transaction,' so the software certainly can do it," says Mykytyn. "Also, I use Quicken for margin accounts. It tracks negative balances and has a menu item to enter margin interest in an account."
"If the system is set up correctly," says Kese, "you could have reports tell you how much margin interest you have paid, although I do not know about incorporating margin interest into gain/loss calculations."
So this may be a case where our readers know more than the company's spokespeople.
Short-Term Gains In Long-Term Accounts
I have no other means of income besides the income I'm receiving from trading. What if I put away 75% of those gains into something that will generate income, such as a money market account, and continue to trade daily with the remaining 25% of the money I initially made? Can I be considered to trade for a living despite the fact that I have money I'm not trading anymore? Obviously the amount of money put into something like a money market account or any other investment would have to be very substantial in order for me to live on the interest. -- Juan Pena
The money you make from your trading activity will be considered part of your trading gains for capital gains purposes, regardless of how you spend those realized gains, notes Jim Calvin, an investment management tax partner at
Deloitte & Touche
in Boston and the editor-in-chief of the
Journal of Taxation of Investments
. You can move that money from your trading account to your investment account without a problem.
Just because you have some investment interest income in another account does not mean you are disqualified from being a trader, says Ted Tesser, CPA in Boca Raton, Fla., and author of
The Trader's Tax Survival Guide
. We've noted
before that you must be living off that interest for the
Internal Revenue Service
to question your status.
I'm 18 years old and I'm still in high school. I trade very frequently. My trades usually last 1 to 2 weeks. Trading is the only way I earn money. So I was wondering if I would be considered a trader or not. -- Jeff Chen
I'm impressed that you're even thinking about this. At 18, the only thing I cared about was the prom and my hair.
First, although there is nothing written on this, your age should not prevent you from claiming trader status, says Calvin of Deloitte & Touche. Nor should the fact that your parents claim you as a dependent, which I assume they still do.
If you trade and have income, you'll have to file a tax return. That means to claim trader status, you'll need to meet the
stringent requirements to which everyone else is subject.
But if you spend your days in the classroom, your primary responsibility is probably to your schoolbooks. So it may be hard for you to prove to the IRS that you do enough trading between homework assignments to qualify for trader status.
I Trade in Both Accounts
Here's a sticky one for you: What if you're a full-time trader actively trading in both your taxable income account and your SEP-IRA account? Because the profits and taxes are being deferred on the retirement account, does it necessarily follow that deductible expenses like commissions are also to be deferred? And can you legitimately claim those same deductions 20 years later when you start to draw on the retirement account? -- Larry Hayes
You cannot claim expenses or commissions related to your SEP-IRA account or any other tax-deferred account, says Richard Shapiro, an
Ernst & Young
securities tax partner.
Any activity in a retirement vehicle is always treated as a retirement account. So those of you who just trade in your retirement account, no matter how active it is, will not qualify as traders.
Commissions and other transaction fees are typically deducted directly from your IRA account. But if you get a charge in the mail from your broker for, say, a custodial fee, and you pay that amount with money from
the IRA, you can deduct that amount as an investment expense. That amount would be reported as a miscellaneous deduction. These deductions can be taken only when, in total, they exceed 2% of your adjusted gross income.
Too Many Losses
I was a trader from March through September 1998. Then I stopped trading and got a job. I have a realized gain of $10,000 on Dec. 31, 1998, but a unrealized loss of $17,000 (only realized when I sell shares this year). Can I deduct business expenses, commissions, etc. for last year and carry the unrealized loss into 1999 under Schedule D because I am not a trader anymore? -- Jeffrey Miltner
You must claim all gains and losses in the year they are realized. So if you have an overall realized gain for 1998, that is all you can claim at this point.
I am assuming that from March through September you qualified for trader status. So any trading-related business expenses you incurred during those six months can be deducted on
- Net Profit from Business
Part 2 of our Taxes for Traders series for more on the logistics of Schedule C.) Any expenses incurred during the remaining months of the year must be reported on
- Itemized Deductions
Assuming you do not elect to mark to market for 1998, all your gains and losses will be reported on
- Capital Gains and Losses
, whether you're a trader or an investor. And that's how you'll report everything in the future.
So if you do realize those losses in 1999, they will be reported on Schedule D of your 1999 tax return. Those losses will be limited to the amount of your 1999 capital gains, plus an additional $3,000. Any additional losses can be carried forward for as many tax years as it takes to use them up, says Shapiro. You can't carry those losses back, though.
In 1998 I took a walk on the wild side and shorted some stocks for the first time. I closed out most, but not all, of the positions by Dec. 31. I have two questions: 1) For the closed positions, how do I report the purchase and sale information on my Schedule D? If I use the actual dates, won't they be backward (selling date earlier than buying date)? Does the IRS care? 2) For the new positions opened in 1998 but not yet closed, will my broker report the short sales as sales to the IRS, requiring me to somehow account for them on my 1998 return so the IRS doesn't think I'm evading capital gains taxes? -- Vindu Goel
If you sell short, then the sale date is going to come before the purchase date. But that is the correct way to record the transaction on Schedule D, says Tesser. And it is not a flag to the government either, confirms Gail Winawer, tax securities partner at
American Express Tax & Business Services
in New York. So don't sweat it.
The taxable event occurs only when the short is closed, says Shapiro. So if you're holding an open short position at year end, you will
owe tax on it. But you will get a Form 1099 from your broker reporting the short sales as sales. When you file your tax return, you'll need to prove to the IRS that these shorts are still open.
Tesser says to attach a reconciliation schedule to your return. "It can be a plain sheet of paper with your name and Social Security number on it," he says. On the bottom of Schedule D, where your shorts are reported, write "See Attached Schedule 1," and then attach a form that looks something like this:
Schedule 1 Gross proceeds from Broker ................... xxxx
Less short sales to be reported in 1999 .......yyyy
Total reported on Schedule D ..................zzzz
Show the final number as gross proceeds on Schedule D.
I Trade in a Joint Account
I am a trader and my husband has a "real" job. The account I trade on is technically a joint account. It is separate from our IRAs, but is in both our names. Is this a problem? -- Dianna Autrey
It depends, says Shapiro. If you can prove your husband is not involved and has no say in the decisions you make, you should be OK. But if you're really serious about trying to qualify for trader status, Shapiro recommends that you operate in your own, separate account.
Why? If your husband executes a trade every now and then, technically, his trades will be considered investments because he is not a trader. That can throw off the status of your trading account.
The IRS recently issued
proposed regulations requiring trading accounts to be separate from other accounts. So it would make sense to comply with this rule until specific issues like yours are properly addressed.
The burden to prove this is strictly a trading account will be much higher if you trade in a joint account.
Can I Have Two Jobs and Be A Trader?
Does simply having another job disqualify one as a trader? -- Mark Addington
Having two jobs does not disqualify you from electing trader status. The reality is that many people do hold down more than one job, says Shapiro. You're just increasing the difficulty of proving you really are a trader. It may be a "hard factual road to hoe to say that a full-time medical doctor who trades between patients is a trader in securities," says Shapiro. But practicing medicine would not automatically disqualify him.
You need to make sure the "hallmarks of trading" are still there, says Calvin. That means you don't hold your securities for more that 30 days, you live predominantly off your trading income and your stated objective is to take advantage of the market swings.