Day Trader Taxes

IRS Virtual Curreny Guidance

noreply@blogger.com (Courtney Kurisko, CPA) — Wed, 14 Mar 2018 00:37:00 +0000

I have received a lot of questions from Day Traders regarding the taxation of Virtual Currency. Please see below guidance from the IRS and contact me if you have further questions or need assistance in filing your Day Trading business tax return.

-Courtney Kurisko

Certified Public Accountant

Courtney@ckaccountingandtaxation.com

IRS Virtual Currency Guidance : Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply

IR-2014-36, March. 25, 2014
WASHINGTON — The Internal Revenue Service today issued a notice providing answers to frequently asked questions (FAQs) on virtual currency, such as bitcoin. These FAQs provide basic information on the U.S. federal tax implications of transactions in, or transactions that use, virtual currency.
In some environments, virtual currency operates like “real” currency -- i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction.
The notice provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:

Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

Further details, including a set of 16 questions and answers, are in Notice 2014-21, posted today on IRS.gov.

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Qualifying as a schedule C Day Trader

noreply@blogger.com (Courtney Kurisko, CPA) — Fri, 07 Jul 2017 12:33:00 +0000

You may qualify for Trader Tax Status and file your Day Trading business on your schedule C on your tax return without making any elections (such as the Sections 179 election) during the year. If you qualify as a day trading business then you can take certain deductions that would not be allowed if you were an investor. These expenses could include home office deductions, subscriptions, travel to trade shows, education, software, market data feeds and margin interest. These deductions are ordinary and will offset ordinary income on your tax return.

Courtney Kurisko, CPA
www.ckaccountingandtaxation.com

Day Trading Radio.com

noreply@blogger.com (Courtney Kurisko, CPA) — Fri, 07 Jul 2017 12:11:00 +0000

DAYTRADINGRADIO.COM

Live Trade Alerts
Weekly Watch Lists
High Probability Setups and Alerts
Trading Rooms
Trading Dashboard
Live News

https://daytradingradio.com/amember/signup.php

2016 Tax Filing- Summer special

noreply@blogger.com (Courtney Kurisko, CPA) — Mon, 05 Jun 2017 16:36:00 +0000

CK Accounting Tax Service is running a summer special for preparing 2016 tax returns for Day Traders. Contact me during the month of June 2017 and receive 10% off your bill.

Courtney Kurisko
845-512-8839
Courtney@ckaccountingandtaxation.com

www.ckaccountingandtaxation.com

Tradelog Software for Traders

noreply@blogger.com (Courtney Kurisko, CPA) — Thu, 20 Apr 2017 12:52:00 +0000

I get a lot of questions about which software to use to compile your trades for tax filing purposes. I highly recommend using Tradelog software. I do not recommend relying on the 1099-B from your broker because they follow a different set of rules for reporting and the 1099-B may be incorrect.

The software is also designed for the mark to market accounting method and even Section 481 adjustments, if necessary.
http://www.tradelogsoftware.com/

CK Accounting and Taxation has an in-depth knowledge of how to use the software, should you need assistance.

www.ckaccountingandtaxation.com

Day Traders - Section 475F election due by April 18th

noreply@blogger.com (Courtney Kurisko, CPA) — Wed, 12 Apr 2017 12:52:00 +0000

The Internal Revenue Code Section 475(f) election is due April 18, 2017 for the 2017 fiscal year even if you are filing an extension of time to file your 2016 tax return. I.R.C. §475 allows traders in securities or commodities, to elect to mark-to-market their securities or commodities to market value as of Dec 31, 2017 and all subsequent tax years . The mark-to-market provisions of I.R.C. §475 require a security or commodity subject to I.R.C. Section 475 to be treated as if it were sold on the last business day of the taxable year for for its fair market value and a gain or loss must be recognized. Also under I.R.C Section 475, the trades subject to the election are not subject to the wash sales rules and those trades are not limited to the capital gain loss limitations.

Please contact me if you would like assistance with your I.R.C. election and/or extension.

Courtney Kurisko
Certified Public Accountant

www.ckaccountingandtaxation.com

Wash sale rule information https://www.irs.gov/publications/p550/ch04.html#en_US_2016_publink100010601

Year end tax planning and bookkeeping

noreply@blogger.com (Courtney Kurisko, CPA) — Thu, 15 Dec 2016 18:50:00 +0000

Year end tax planning and bookkeeping. Don't wait until tax time to get your books done for 2016. I will assist with you with business and/or personal tax planning before the end of the year to help save money on taxes.

There are many changes to come with the upcoming new administration but there are some strategies that can still be used to reduce your 2016 taxes and plan for 2017. For example, if tax rates are going to go down in 2017, you may want to defer income and accelerate your deductions for 2016. The (PATH) Act of 2015 extended or made permanent a number of tax benefits that had previously expired. Those are useful for tax planning for 2016. And Day Traders are still subject to the Net Investment Income tax which is 3.8% of certain net investment income.

Contact me for further information or for assistance with your 2016 taxes.

CK Accounting Tax Service, LLC

www.ckaccountingtaxservice.com

Courtney@ckaccountingandtaxation.com

845-512-8839

Mid- Year Tax Planning for Day Traders

noreply@blogger.com (Courtney Kurisko, CPA) — Mon, 06 Jun 2016 16:32:00 +0000

June is a great time to take a look at year to date gains or losses and re-adjust your tax strategy for the year. For example, if you are trading as a sole proprietor and you have not made the IRC 475(f) mark to market election, you may want to consider switching to an entity for the remainder of the year. This will allow you to possibly make the mark to market 475f election and unlock some additional tax benefits. You could start paying yourself a salary which will allow you to take a deduction for health care and retirement contributions, if you qualify.

-Courtney Kurisko
Courtney@ckaccountingandtaxation.com

https://www.irs.gov/taxtopics/tc429.html

noreply@blogger.com (Courtney Kurisko, CPA) — Fri, 26 Feb 2016 17:44:00 +0000

The information below is per IRS web sight - thought I would share for Day Traders.

Topic 429 - Traders in Securities (Information for Form 1040 Filers)
This topic explains if an individual who buys and sells securities qualifies as a trader in securities for tax purposes and how traders must report the income and expenses resulting from the trading business. The term security is defined in Internal Revenue Code section 475(c)(2). In general, the term security includes a share of stock, beneficial ownership interests in certain partnerships and trusts, evidence of indebtedness, and certain notional principal contracts, as well as evidence of an interest in, or a derivative financial instrument in, any of these items and certain identified hedges of these items. Please refer to section 475(c)(2) for a complete list of items that qualify as a security. To better understand the special rules that apply to traders in securities, it is helpful to review the meaning of the terms investor, dealer, and trader, and the different manner in which they report the income and expenses relating to their activities.
InvestorsInvestors typically buy and sell securities and expect income from dividends, interest, or capital appreciation. They buy and sell these securities and hold them for personal investment; they are not conducting a trade or business. Most investors are individuals and hold these securities for a substantial period of time. Sales of these securities result in capital gains and losses that must be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses and on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets, as appropriate. Investors are subject to the capital loss limitations described in section 1211(b), in addition to the section 1091 wash sales rules. Investors may be able to benefit from a deduction for the expenses of producing taxable investment income. These include expenses for investment counseling and advice, legal and accounting fees, and investment newsletters. They report these expenses on Form 1040, Schedule A (PDF), Itemized Deductions, as miscellaneous deductions allowable to the extent that they exceed 2% of adjusted gross income. They can also deduct interest paid for money to buy or carry investment property that produces taxable income on Schedule A, but under section 163(d), the deduction cannot exceed the net investment income. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss upon disposition of the securities. Review Topic 703, Basis of Assets for additional information. Investment income is not subject to self-employment tax. For more information on investors, refer to Publication 550, Investment Income and Expenses.
DealersDealers in securities may be individuals or business entities. Dealers purchase, hold, and sell securities to their customers in the ordinary course of their trade or business. Sometimes they maintain an inventory. Dealers are distinguished from investors and traders because they have customers and derive their income from marketing securities for sale to customers. Section 475 requires dealers to keep and maintain records that clearly identify securities held for personal gain versus those held for use in their business activity. Dealers must report gains and losses associated with dispositions of securities by using the mark-to-market rules discussed below.
TradersSpecial rules apply if you are a trader in securities, in the business of buying and selling securities for your own account. The law considers this to be a business, even though a trader does not maintain an inventory and does not have customers. To be engaged in business as a trader in securities, you must meet all of the following conditions:

You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
Your activity must be substantial; and
You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a securities trading business:

Typical holding periods for securities bought and sold;
The frequency and dollar amount of your trades during the year;
The extent to which you pursue the activity to produce income for a livelihood; and
The amount of time you devote to the activity.

If the nature of your trading activities does not qualify as a business, you are considered an investor and not a trader. It does not matter whether you call yourself a trader or a day trader, you are an investor. A taxpayer may be a trader in some securities and may hold other securities for investment. The special rules for traders do not apply to the securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day he or she acquires them (for example, by holding them in a separate brokerage account).
Traders report their business expenses on Form 1040, Schedule C (PDF), Profit or Loss From Business. The Schedule A limitations on investment interest expense, which apply to investors, do not apply to interest paid or incurred in a trading business. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss upon disposition of the securities. See Topic 703, Basis of Assets. Gains and losses from selling securities from being a trader are not subject to self-employment tax.
The Mark-to-Market ElectionTraders can choose to use the mark-to-market rules, investors cannot. If a trader does not make a valid mark-to-market election under section 475(f), then he or she must treat the gains and losses from sales of securities as capital gains and losses and report the sales on Form 1040, Schedule D (PDF), Capital Gains and Losses and on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets, as appropriate. When reporting on Schedule D, both the limitations on capital losses and the wash sales rules continue to apply. However, if a trader makes a timely mark-to-market election, then he or she can treat the gains and losses from sales of securities as ordinary gains and losses (except for securities held for investment - see above) that must be reported on Part II of Form 4797 (PDF), Sales of Business Property. Neither the limitations on capital losses nor the wash sale rules apply to traders using the mark-to-market method of accounting.
In general, a trader must make the mark-to-market election by the due date (not including extensions) of the tax return for the year prior to the year for which the election becomes effective. You can make the election by attaching a statement either to your income tax return or to a request for an extension of time to file your return. The statement should include the following information:

That you are making an election under section 475(f);
The first tax year for which the election is effective; and
The trade or business for which you are making the election.

Refer to the Form 1040, Schedule D Instructions (PDF), Capital Gains and Losses, for more information on how to make the mark-to-market election. It is important to note that in general, late section 475(f) elections are not allowed.
After making the election to change to the mark-to-market method of accounting, you must change your method of accounting for securities under Revenue Procedure 2015-14. In addition to making the election, you will also be required to file a Form 3115 (PDF), Application for Change in Accounting Method (see Revenue Procedure 2015-13). Publication 550 describes the procedures for making an election under the section called "Special Rules for Traders in Securities." Non-filing of the Form 3115 mentioned above will not invalidate a timely and valid election.
If you have made a valid election under section 475(f), the only way to stop using mark-to-market accounting for securities is to file an automatic request for revocation under Revenue Procedure 2015-14, Section 23.02. Under that revenue procedure, the request for revocation must be filed by the original due date of the return (without regard to extensions) for the taxable year preceding the year of change. This revocation notification statement must be attached to either that return or if applicable, to a request for extension of time to file that return. Late revocations will not generally be allowed except in unusual and compelling circumstances.

Join me at the Traders Expo in NYC Feb 23, 2016

noreply@blogger.com (Courtney Kurisko, CPA) — Tue, 09 Feb 2016 18:00:00 +0000

I will be at the Day Trading Radio, Inc booth on Tuesday Feb23rd at the Traders Expo in NYC for a meet and greet with Day Traders. Stop by booth number 6102 to say hello.

Courtney Kurisko, CPA
www.ckaccountingandtaxation.com
www.daytradingradio.com

Net Investment Income Tax And How It Applies To Day Traders

noreply@blogger.com (Courtney Kurisko, CPA) — Thu, 05 Mar 2015 13:17:00 +0000

The Net Investment Income Tax law (NIIT) law requires a 3.8% tax on the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status. This law went into effect on Jan 1, 2013 but I still receive a lot of inquiries on the subject.

Examples of investment income sources are interest, dividends, capital gains, rental and royalty income and annuities. The IRS also specifically states that the NIIT applies to "Section 1411(c)(1)(A) defines net investment income, in part, by reference to trades or businesses described in section 1411(c)(2). A trade or business is described in section 1411(c)(2) if such trade or business is: (A) a passive activity (within the meaning of section 469) with respect to the taxpayer, or (B) a trade or business of trading in financial instruments or commodities (as defined in section 475(e)(2)). - 6 - Section 1.1411-5 of the final regulations provides guidance on the trades or businesses described in section 1411(c)(2)."

This means that your day trading income is subject to the tax even if you made the mark to market election and your trading income is classified as ordinary income. You would owe the tax if your MAGI is above the threshold amounts (Single or Head of Household $200,000, MFJ $250,000, MFS $125,000 and Qualifying Widower with a Child $250,000). You can offset the tax by your business expenses that qualify as part of your day trader tax business.

If you have any questions or are a day trader looking for an accountant that specializes in Day Trading taxes, please email me at Courtney@ckaccountingandtaxation.com or visit my web sight at www.ckaccountingandtaxation.com.

source:https://www.federalregister.gov/articles/2013/12/02/2013-28410/net-investment-income-tax

New web sight and ready for year end planning

noreply@blogger.com (Courtney Kurisko, CPA) — Tue, 02 Dec 2014 16:55:00 +0000

We have reformatted our web sight www.ckaccountingandtaxation.com. Day traders should be doing some year end planning although as of today we are still waiting to hear if congress will renew tax breaks that are set to expire. Day Traders should plan for the net investment income tax and see if it will apply to them and consider making a 4th quarter estimated tax payment.

Also, now is the time to start planning on forming an LLC or other trading entity for 2015. Remember that trading income is not subject to self employment taxes so if you need self employment income to unlock tax deductions, you should have an accountant calculate how much to pay yourself in 2014.

If you have any questions or are looking for an accountant that specializes in day trader taxes, please email me at Courtney@ckaccountingandtaxation.com.

Courtney Kurisko
CPA

Recent court ruling for day traders

noreply@blogger.com (Courtney Kurisko, CPA) — Mon, 02 Dec 2013 19:21:00 +0000

Here is a quick reminder of what the IRS is looking for:

 A new court case Nelson, C.T. Memo 2013-259.

" For a taxpayer to be a trader, the trading activity must be substantial. In

other words, the trading activity must be frequent, regular, and continuous enough
                                         - 13 -

[*13] to qualify as a trade or business within the meaning of section 162(a). See

Endicott v. Commissioner, at *13; Ball v. Commissioner, T.C. Memo. 2000-245,

2000 Tax Ct. Memo LEXIS 289, at *4."

 Not only did the taxpayer not keep good books and records, she did not qualify as a day trader.

 http://www.ustaxcourt.gov/InOpHistoric/nelsonmemo.chiechi.TCM.WPD.pdf

 -Courtney Kurisko

CK Accounting Tax Service, LLC

ckaccountants@yahoo.com

Day Traders and the Home Office Deduction

noreply@blogger.com (Courtney Kurisko, CPA) — Mon, 03 Jun 2013 11:34:00 +0000

Many Day Traders work from a home office and the IRS rules on who may qualify are strict but as of January 2013 there is a simplified calculation for the deduction available. Under the simplified calculation, you no longer need to calculate depreciation or recapture of depreciation and the IRS gives you an allowable itemized deduction for home expenses. The allowable deduction is the square footage (not to exceed 300) @$5 a square foot. The deductions under the simple method are reported on your schedule A instead of being split between two schedules.

With the simplified calculation, it reduces the record keeping significantly for the taxpayer and accountant which can reduce your fees paid to the accountant. But there are a downsides to the standard home office deduction so make sure your professional knows which method would be best for you.

See the comparison chart at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Simplified-Option-for-Home-Office-Deduction

Make sure you use a professional that is familiar with the deductions available to day traders. You can contact me at ckaccountants@yahoo.com or visit my web site at www.ckaccountingandtaxation.com.

Courtney Kurisko, CPA
Day Trader Taxes

Revoking the IRC 475f election

noreply@blogger.com (Courtney Kurisko, CPA) — Thu, 02 May 2013 16:53:00 +0000

For some reason (market conditions???) I am receiving a lot of inquiries regarding having the mtm election revoked this year so I decided to write a brief blog with information. The following is subject to change because the rules on revoking the election are not clear and you cannot get an exact answer from an IRS agent. This is based on my research and interpretation of the IRS code and form instructions. You should always consult with a professional.

It is very difficult to have your 475f election revoked by the IRS. You must write a letter to the IRS requesting permission to have the election revoked because you no longer qualify as a day trader. The request should be sent to the same address that your Federal tax return is sent to. You will need to file another Form 3115 for change of accounting method to switch back to a cash basis tax payer. This will require a fee since the change is not an automatic change. If you do nothing, the fees will be greater than the initial request. Simply no longer filing as a day trader under 475 is not an option.

The IRS needs to acknowledge the revocation and may request additional information from prior years to ensure that you filed according the IRS guidelines.

Sincerely,

Courtney Kurisko, CPA
www.ckaccountingandtaxation.com

Broadcasting on Daytradingradio.com today at 5:00

noreply@blogger.com (Courtney Kurisko, CPA) — Tue, 09 Apr 2013 17:42:00 +0000

I will be speaking about last minute tax tips for the 2012 tax season today at 5:00 on www.daytradingradio.com. It is a brief discussion just to address some last minute concerns of day traders.

-Courtney Kurisko, CPA
www.ckaccountingandtaxation.com

Tax Season 2012

noreply@blogger.com (Courtney Kurisko, CPA) — Fri, 22 Mar 2013 16:58:00 +0000

It took the IRS a while to get their forms ready this tax season but now everyone is in full effect. The fiscal cliff tax law changes really effect every individual that pays federal tax. Here is a very brief summary for 2012 taxes because I have been receiving a lot of questions:
-Households with incomes up to $200,000 ($250,000 Joint filers) will pay higher social security taxes on the first $113,700 of wages.
-Households with incomes between $200,000 and $400,000 ($250,000 and $450,000 Joint filers) are affected by new phase outs. They also have a new Medicare surtax of .9% of wages and 3.8% of some of or all of their investment income.
-Above $400,000 in income ($450,000 joint filers) are subject to the higher social security taxes, reduced phase outs, the Medicare surtax and the new 39.6% marginal tax rate. At the 39.6% tax bracket, the qualified dividends and long term capital gains are taxed at 20%.

Some reminders for tax season:
There is no penalty for going on extension as long as you make a payment with the extension. The extension is only an extension for time to file, not an extension on making payments.
Your Mark to Market 475(f) election is due by April 15th, 2013 if you are an individual making the election for 2013.
Home office deduction needs to be a separate area in the home that is for regular and exclusive use and your principal place of business (http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction)
Special rules apply if your child's investment income is over $1900. The parents tax rate may apply.

We are taking new clients this year but may have to put you on extension. Please email me to set up a consultation. We specialize in taxes for day traders.

-Courtney Kurisko, CPA
ckaccountants@yahoo.com

Guest on Daytradingradio.com Tuesday 1/8/13

noreply@blogger.com (Courtney Kurisko, CPA) — Tue, 08 Jan 2013 02:46:00 +0000

CK Accounting Tax Service will be a guest on Daytradingradio.com Tuesday night 1/8/13 @ 8pm EST. It will be a brief session for day traders talking about:

- Tax planning (year end and year around)
- Basic questions that day traders might have (incorporate, mtm, records, etc)
- How the new Fiscal Cliff deal might affect you

The intention is to re-introduce myself to the daytradingradio listeners and help them to better understand how important it is to make sure you are doing the right thing tax wise before it's too late in the year. We were unable to do much tax planning at the end of 2012 because we were waiting on the vote from congress, but now that we have the information, we can move forward.

Tune in tomorrow!

Courtney Kurisko
Certified Public Accountant

Happy almost Oct 15th!

noreply@blogger.com (Courtney Kurisko, CPA) — Thu, 11 Oct 2012 17:17:00 +0000

Happy end of tax season, October 15th is almost here! I hope everyone was able to reconcile to their broker statements and were able to file on time! Let's start planning for our 2012 taxes and new tax laws.
-Courtney Kurisko
Certified Public Accountant

How to Protect Your Trader Tax Status

noreply@blogger.com (Courtney Kurisko, CPA) — Thu, 23 Aug 2012 22:34:00 +0000

If you have made the mark to market 475f election, make sure your tax returns are filed correctly and on time to insure that you will keep your trader tax status. You need to file a form 3115 the year after you made the election. This is to notify the IRS that you changed your accounting method for the prior year. You also need the correct business code on your schedule C or business tax return. I recommend using 523110. You also need to state on the return that you made the mark to market election and explain to the IRS how you report your income and expenses. The more information the better for the IRS.

File the trades on the correct form. After you make the mark to market election you no longer file your trades on schedule D. The trades are reported on Form 4797 (Sales of Business Property).

Don't forget to keep good records of your trading activity. Even if you do not place a trade I would recommend keeping a journal of the stocks you are watching each day.

Also, if you have another job be sure to check with your accountant or contact us because you may not qualify for trader tax status. A new tax court ruling ruled against a trader because the trading income was not the "sole and primary income-producing activity". (Frank Chen case).

Sincerely,
Courtney Kurisko
CK Accounting Tax Service, LLC

Form 8949

noreply@blogger.com (Courtney Kurisko, CPA) — Mon, 02 Apr 2012 18:26:00 +0000

As a trader I am sure you have heard of the nightmare that the new IRS regulations for reporting on Form 8949 are causing. The form is a result of the new IRS requirements that brokers report the cost basis on your 1099B. In prior years the brokers were only required to report the sales. The problem is that these 1099-B's have large discrepancies with the cost basis that is being calculated by yourself or your CPA.
Our recommendation is to extend your tax return if possible for this tax year. The brokerages need to deal with the discrepancies and send out amended 1099'B's.

Happy Trading!

Courtney Kurisko, CPA

Self Employment Taxes

noreply@blogger.com (Courtney Kurisko, CPA) — Wed, 25 Jan 2012 19:47:00 +0000

Issue Number: IRS Tax Tip 2012-16

Tax Tips for the Self-employed

NOTE: Day Traders are not subject to SE tax only income tax and if you have not made the 475f election, then capital gains tax(see #2). The information below is from the IRS.GOV web site and I thought it would be useful since most traders are self employed.

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.
Here are six key points the IRS would like you to know about self-employment and self- employment taxes:
1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.
2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.
3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.
4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.
5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
For more information see the Self-employment Tax Center, IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

Links:
Publication 334, Tax Guide for Small Business
Publication 535, Business Expenses
Publication 505, Tax Withholding and Estimated Tax
Schedule C, Profit or Loss from Business and instructions
Schedule C-EZ, Net Profit from Business
Schedule SE, Self-Employment Tax and instructions
Form 1040-ES, Estimated Tax for Individuals

Keeping good records- low volume of trades

noreply@blogger.com (Courtney Kurisko, CPA) — Sun, 12 Dec 2010 14:12:00 +0000

I am currently involved in an audit with one of my clients and the main issue at stake is whether or not my client had enough trades to qualify as a trader. My client has been a day trader since 2002 and made the 475f election years ago. There is no doubt that my client is a full time trader in my opinion. The taxpayer is in front of the computer 8-10 hours a day looking for setups, researching and trading and the trading income is their only source of income. The issue arises in the year that they traded options and the volume of trades is considerably low.
The client may be able to prove that she has been trading full time even though she only executed trades on 26% of the available trading days because she kept a journal of all trades that she was looking at on a daily basis. She dated the pages and even though the notes are not very presentable to an IRS agent, she does have the daily logs available to submit as evidence that she was in fact working on 95% of the available trading days.
Also in her favor is she was trading only options and perfect setups for options trading are not always available on a daily basis.
The IRS agent is using the court case William G. HOLSINGER and Joann Mickler, Peti-tioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. No. 15563-06. Aug. 11, 2008. I will post the summary of this case in a second blog entry.
I will you updated as to the outcome of the audit. In the meantime I just wanted to remind traders that the number one variable being looked at to determine if she qualifies as a trader is the volume of trades. I also want to stress that it is important to keep some sort of log on a daily basis.
-Courtney Kurisko, CPA

William G. HOLSINGER and Joann Mickler, Peti-tioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. No. 15563-06. Aug. 11, 2008

noreply@blogger.com (Courtney Kurisko, CPA) — Sun, 12 Dec 2010 14:10:00 +0000

United States Tax Court.
William G. HOLSINGER and Joann Mickler, Peti-tioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
No. 15563-06.

Aug. 11, 2008.

Background: Taxpayers petitioned for redetermina-tion of federal income tax deficiencies.

Holdings: The Tax Court, Vasquez, J., held that:
(1) net losses from purchases and sales of securities for two tax years at issue were capital losses and only partially deductible, and
(2) expenses that taxpayers attributed to securities trading activity were not deductible as business ex-penses.

Decision for IRS.

[1] Internal Revenue 220 3396

220 Internal Revenue
220V Income Taxes
220V(I) Deductions
220V(I)3 Losses
220k3396 k. Trade or Business. Most Cited Cases
Taxpayers were investors, rather than traders in secu-rities, and thus, net losses from purchases and sales of securities for two tax years at issue were capital losses and only partially deductible; taxpayers' trad-ing was not substantial, as they traded on less than 40% of trading days in first year and less than 45% of trading days in second year, and taxpayers did not seek to catch swings in daily market movements and to profit from these short-term changes, as they rarely bought and sold on same day, and significant amount of their holdings was held for more than 31 days. 26 U.S.C.A. § 475.

[2] Internal Revenue 220 3396

220 Internal Revenue
220V Income Taxes
220V(I) Deductions
220V(I)3 Losses
220k3396 k. Trade or Business. Most Cited Cases
Because taxpayers' securities trading activity did not rise to level of business of trading securities, ex-penses they attributed to that activity, even if incurred on their corporation's behalf, were not deductible as business expenses. 26 U.S.C.A. § 6001; 26 C.F.R. § 1.6001-1(a).
V. Jean Owens and James S. Eggert, for petitioners.

Stephen R. Takeuchi, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge.

*1 Respondent determined deficiencies of $54,462 and $43,423 in petitioners' 2001 and 2002 Federal income taxes, respectively. Respondent amended his answer and increased petitioners' 2001 deficiency by $20,278, for a total 2001 deficiency of $74,740. After concessions by both parties, the issues for decision are: (1) Whether losses from purchases and sales of securities are deductible by petitioners as ordinary losses or are instead subject to the limitations appli-cable to capital losses; and (2) whether expenses at-tributable to those purchases and sales are deductible by petitioners as business expenses or are instead subject to the limitations applicable to itemized de-ductions.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and the attached ex-hibits are incorporated herein by this reference. At the time they filed the petition, petitioners resided in Florida.

William Holsinger (petitioner) retired in 1992, having worked approximately 30 years for Eli Lilly & Co. In 1999 petitioners married. In 2000 petitioners began buying and selling stocks, earning approximately $280,000 from that source during 2000. Petitioner opened brokerage accounts in his name, using his Social Security number. Petitioners reported their trading FN1 income as capital gains in 2000.

On April 19, 2001, petitioners incorporated Alpha Trading Co. of Sarasota, L.L.C. (Alpha) under the laws of Florida. Petitioner owns 67 percent of Alpha, and petitioner Mickler owns the remaining 33 per-cent. On or about May 17, 2001, Alpha made a timely election pursuant to section 475(f) to use the mark-to-market method of accounting.FN2

Petitioners maintained two trading accounts with E-Trade, two with Options Xpress, and one with Ameritrade-Comdisco. From April 19 until Decem-ber 31, 2001, petitioners executed approximately 289 trades on their various trading accounts. In 2002 peti-tioners executed approximately 372 trades.

In 2001 petitioners claimed an ordinary loss of $180,174 FN3 from Alpha on their 2001 Schedule E, Supplemental Income and Loss. The loss consists of trading losses of $178,870, depreciation of $1,284, and interest of $40. The aggregate cost or other basis of the securities sold in 2001 was $933,147. The sale prices in 2001 collectively were $754,277. Also in 2001 petitioners claimed a net loss of $80,100 on their Schedule C, Profit or Loss From Business. Re-spondent disallowed the $80,100 as business ex-penses but allowed itemized deductions for invest-ment interest of $7,620 and miscellaneous deductions of $72,480. After adjustments for gross income limi-tations, respondent allowed net itemized deductions of $69,153.

In 2002 petitioners claimed an ordinary loss of $45,521. This loss comprises $11,227 in trading losses related to Alpha and $34,294 in claimed busi-ness expenses related to Alpha. Respondent disal-lowed the $34,294 as business expenses but allowed a net itemized deduction of $26,181.

*2 After petitioner incorporated Alpha, he did not switch the name on his trading accounts. Petitioner's Social Security number also remained on the trading accounts. Petitioners continued to trade stocks and options during 2001 and 2002 with the accounts they had used before the incorporation of Alpha. In De-cember 2002 petitioners had one trading account in Alpha's name. During the years in issue petitioners used five accounts to conduct trades.

Petitioners traded from a room in their house. The room contained computers with Internet access in order for petitioners to trade and do research. Addi-tionally, petitioner had four monitors connected to his computer because he wanted to be able to trade and track different investments and potential investments simultaneously. Petitioner purchased the computer equipment around July 1, 2000, before incorporating Alpha. None of the computer equipment was trans-ferred to Alpha.

OPINION

I. Mark-to-Market Election

Respondent concedes that Alpha made a timely mark-to-market election pursuant to section 475(f). Section 475(f) applies only to those engaged in a trade or business as traders in securities. Having made a timely election, if Alpha were a trader in se-curities, it would be eligible to recognize gain or loss on any security held in connection with such a trade or business at the close of any taxable year as if the security were sold at its fair market value on the last business day of the taxable year. See sec. 475(f)(1)(A)(I). In general any gains or losses with respect to the securities, whether deemed sold at year end under the mark-to-market method of accounting or actually sold during the taxable year, shall be treated as ordinary income or loss. Sec. 475(d)(3)(A)(I). If Alpha is considered an investor in securities, the 2001 and 2002 net losses from the pur-chases and sales of securities would be capital losses and only partially deductible to petitioners.

II. Trade or Business

[1] The Internal Revenue Code does not define the term “trade or business” for purposes of section 162. Commissioner v. Groetzinger, 480 U.S. 23, 27, 107 S.Ct. 980, 94 L.Ed.2d 25 (1987); Estate of Yaeger v. Commissioner, 889 F.2d 29, 33 (2d Cir.1989), affg. T.C. Memo.1988-264. Whether activities constitute a trade or business is a question of fact. See Higgins v. Commissioner, 312 U.S. 212, 217, 61 S.Ct. 475, 85 L.Ed. 783 (1941); Estate of Yaeger v. Commissioner, supra at 33; Mayer v. Commissioner, T.C. Memo.1994-209; Paoli v. Commissioner, T.C. Memo.1991-351. Petitioners have neither claimed nor shown that they satisfied the requirements of sec-tion 7491(a) to shift the burden of proof to respon-dent with regard to any factual issue. Accordingly, petitioners bear the burden of proof. See Rule 142(a).

Petitioners argue that they were traders, trading as agents of Alpha. With the incorporation of Alpha, petitioners argue they became traders. In determining whether a taxpayer's trading activity constituted a trade or business, courts have distinguished between “traders” and “investors”. Moller v. United States, 721 F.2d 810, 813 (Fed.Cir.1983); see also Levin v. United States, 220 Ct.Cl. 197, 597 F.2d 760, 765 (1979).

*3 In determining whether a taxpayer is a trader, nonexclusive factors to consider are: (1) The tax-payer's intent, (2) the nature of the income to be de-rived from the activity, and (3) the frequency, extent, and regularity of the taxpayer's securities transac-tions. Moller v. United States, supra at 813. For a taxpayer to be a trader the trading activity must be substantial, which means “ ‘frequent, regular, and continuous enough to constitute a trade or business' “ as opposed to sporadic trading. Ball v. Commissioner, T.C. Memo.2000-245 (quoting Hart v. Commis-sioner, T.C. Memo.1997-11). A taxpayer's activities constitute a trade or business where both of the fol-lowing requirements are met: (1) The taxpayer's trad-ing is substantial, and (2) the taxpayer seeks to catch the swings in the daily market movements and to profit from these short-term changes rather than to profit from the long-term holding of investments. Mayer v. Commissioner, supra.

As to the first requirement, we find petitioners' trad-ing was not substantial. Courts consider the number of executed trades in a year and the amount of money involved in those trades when evaluating whether a taxpayer's trading activities were substantial. See, e.g., Mayer v. Commissioner, supra; Paoli v. Com-missioner, supra. In Paoli, the Court held trading activities were substantial when the taxpayers traded stocks or options worth approximately $9 million. In Mayer, the Court considered over 1,100 executed sales and purchases in each of the years at issue therein to be substantial trading activity. Trading ac-tivity was found to be insubstantial when a taxpayer executed at most 83 purchases and 41 sales in one year and 76 purchases and 30 sales in the second year. Moller v. United States, supra at 813. In 2001 petitioners executed approximately 289 trades. An analysis of petitioners' trading activity reveals that in 2001 they traded on 63 days. This total represents less than 40 percent of the trading days from April 19, 2001, the day petitioners incorporated Alpha, until December 31, 2001. In 2002 petitioners traded on 110 days and executed approximately 372 trades. This total represents less than 45 percent of the trad-ing days in 2002. We find it doubtful whether the trades were conducted with the frequency, continuity, and regularity indicative of a business.

As to the second requirement, petitioners have failed to prove that they sought to catch the swings in the daily market movements and to profit from these short-term changes rather than to profit from the long-term holding of investments. Petitioner testified that his goal in forming Alpha was to profit from short-term swings in the market. Additionally, peti-tioner testified that he usually closed his account at the end of the day and tried to avoid holding stocks and options overnight. The documentary evidence, however, paints a different picture. A list of petition-ers' trades shows they rarely bought and sold on the same day. Furthermore, a significant amount of peti-tioners' holdings was held for more than 31 days. As a result, we find that petitioners have not demon-strated that they sought to capture the daily swings in the market. We find that they were not traders, but investors. Petitioners' trading pattern is consistent with that of an investor, not of a trader.

III. Business Expenses

*4 [2] Deductions are a matter of legislative grace, and the taxpayer has the burden of showing entitle-ment to any deduction claimed. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84, 112 S.Ct. 1039, 117 L.Ed.2d 226 (1992). Taxpayers must substantiate amounts claimed as deductions by maintaining the records necessary to establish such entitlement. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.; see Hradesky v. Commissioner, 65 T.C. 87, 1975 WL 3047 (1975), affd. per curiam 540 F.2d 821 (5th Cir.1976).

Petitioners claimed business deductions for 2001 and 2002. Petitioners argue that their trading activity was on behalf of Alpha, not for themselves as individuals. Petitioners claim they were Alpha's agents and there-fore had the authority to conduct trades on its behalf. Even if petitioners acted on Alpha's behalf, because their activity, as we have already found, did not rise to the level of a business (the business of trading se-curities), the expenses petitioners attributed to that activity, even if incurred on Alpha's behalf, are not deductible as business expenses.

In reaching all of our holdings herein, we have con-sidered all arguments made by the parties, and to the extent not mentioned above, we find them to be ir-relevant or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

FN1. The use of the term “trading income” is not a conclusion that petitioners or Alpha were engaged in a business of trading in se-curities.

FN2. Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FN3. The 2001 ordinary loss petitioners claimed on Schedule E is $20 less than the total claimed of the trading losses, deprecia-tion, and interest. Both parties have stipu-lated the amounts, and there appears to be no explanation for the $20 discrepancy. The $20 discrepancy has no effect as to the out-come of the case.

U.S.Tax Ct.,2008.
Holsinger v. C.I.R.
T.C. Memo. 2008-191, 2008 WL 3286960 (U.S.Tax Ct.), 96 T.C.M. (CCH) 85, T.C.M. (RIA) 2008-191, 2008 RIA TC Memo 2008-191

END OF DOCUMENT

Wash sale rules

noreply@blogger.com (Courtney Kurisko, CPA) — Wed, 01 Sep 2010 18:56:00 +0000

If you are a day trader and have not made the mark to market election 475f, you are subject to wash sales rules. Wash sale rules are as follows, if you sell a security or a contract or option to buy a stock at a loss and then buy the same security within a 30 day period then that loss is disallowed. The time period is 30 days before and after the sale.
The disallowed loss is actually deferred- it is added to the basis of the replacement stock and your holding period for the replacement stock includes the holding period for the security that you sold.
The wash sale rule only applies to losses and does not apply if you have made the mark to market election.
-Courtney Kurisko
Certified Public Accountant