How difficult would it be for one to get classified under IRS section 475(f)

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Submitted by flu on December 6, 2012 - 11:45am

Ok so I'll post this question in case someone here knows the answer...

How hard is it to be recognized by IRS for section 475(f) election?

Does having a full time job elsewhere cause issues with this?

Anyone know of a CPA that deals with this?

Submitted by flu on December 6, 2012 - 2:48pm.

bump.

Submitted by SK in CV on December 6, 2012 - 3:26pm.

Not terribly difficult, and it's unrelated to having a full time job. Just have to follow the rules. There's a firm that specializes in setting them up, www.tradersaccounting.com. I've heard mixed reviews.

Why exactly would you want to?

Submitted by no_such_reality on December 6, 2012 - 3:32pm.

You banking on having a bad year? Or am I missing something, seems like the upside of 475(f) is you're not limited on taking your losses.

Submitted by flu on December 6, 2012 - 3:49pm.

SK in CV wrote:
Not terribly difficult, and it's unrelated to having a full time job. Just have to follow the rules. There's a firm that specializes in setting them up, www.tradersaccounting.com. I've heard mixed reviews.

Why exactly would you want to?

Well, I was talking to 2 cpas this week, and looking at my trading history for the years, they indicated it *might* be possible for me to reclassified as a "trader" for the purpose of 475(f)....

However, they did warn me about the risks too. It was more of a brainstorming then action.. I wanted to get a third/forth opinion on it...

I was thinking being otherwise full time employed as a software geek might be an issue.

From the perspective of trading volume, frequency, duration, amount, and percentage of realized income versus everything else of income, I would probably be ok, at least based on what others have written about it...

I don't have the proper structure setup (obviously not yet).

Basically, I think I would be better off if I could report all my short term flips/etc on a schedule C versus schedule D.

What generally are the litmus tests? Does being fully employed as a geek simultaneously cause issues?

Submitted by flu on December 6, 2012 - 3:48pm.

.

Submitted by SK in CV on December 6, 2012 - 3:51pm.

flu wrote:
SK in CV wrote:
Not terribly difficult, and it's unrelated to having a full time job. Just have to follow the rules. There's a firm that specializes in setting them up, www.tradersaccounting.com. I've heard mixed reviews.

Why exactly would you want to?

Well, I was talking to 2 cpas this week, and looking at my trading history for the years, they indicated it *might* be possible for me to reclassified as a "trader" for the purpose of 475(f)....

However, they did warn me about the risks too. I was doing some research on it, and trying to figure out if I would meet the litmus test..

I was thinking being otherwise full time employed as a software geek might be an issue.

From the perspective of trading volume, frequency, duration, amount, and percentage of realized income versus everything else of income, I would probably be ok, at least based on what others have written about it...

I don't have the proper structure setup (obviously not yet).

Basically, I think I would be better off if I could report all my short term flips/etc on a schedule C versus schedule D.

It's not quite as simple as reporting flips on sched C. It also includes marking securities to market. You have some time. The election for 2013 has to be filed by 4/15 next year.

Are most of your trades stocks? Futures/options/forex get some favorable tax treatment as it is. Unless you spend a ton of money on investment expenses, I'm not sure what kind of tax savings you'd have by putting it all on a sched C.

Submitted by no_such_reality on December 6, 2012 - 3:58pm.

flu wrote:

Basically, I think I would be better off if I could report all my short term flips/etc on a schedule C versus schedule D.

Schedule C income transfers to AGI, line 12.
Schedule D short term gains transfers to AGI, line 13

Are they treated differently for AMT?

Or are you thinking you have expenses to bury on Schedule C?

Or is this a 3.8% Obamacare tax thing?

Did either tax guy do a promo-forma on last year's tax return to estimate the tax savings if you would have been 475(f)?

Submitted by flu on December 6, 2012 - 4:14pm.

SK in CV wrote:

It's not quite as simple as reporting flips on sched C. It also includes marking securities to market. You have some time. The election for 2013 has to be filed by 4/15 next year.

Are most of your trades stocks? Futures/options/forex get some favorable tax treatment as it is. Unless you spend a ton of money on investment expenses, I'm not sure what kind of tax savings you'd have by putting it all on a sched C.

Mostly stocks.... some future...options... ... 2012 transactions will be close to 1500, and close transaction volume..well let's not go there...... Some investment expenses...Some expenses related to technology

.. Also, if run as a business, can't I do things like a IRA/401k up to $49,000 (minus the $17000 or so from the W2 employer)?

Also, at that point, wash sale rules don't apply as well, right?

Thanks for spending the time to comment on this, BTW... Financing/accounting clearly is not more area of expertise.

Submitted by flu on December 6, 2012 - 4:19pm.

no_such_reality wrote:
flu wrote:

Basically, I think I would be better off if I could report all my short term flips/etc on a schedule C versus schedule D.

Schedule C income transfers to AGI, line 12.
Schedule D short term gains transfers to AGI, line 13

Are they treated differently for AMT?

Or are you thinking you have expenses to bury on Schedule C?

Or is this a 3.8% Obamacare tax thing?

Did either tax guy do a promo-forma on last year's tax return to estimate the tax savings if you would have been 475(f)?

No, it was a meeting in which basically lasted for 1.5 hours with both telling me essentially for 2012 I was screwed, and then looking at what I was doing for the past few years and saying "you know, look into this for 2013..."
And then I needed to go...

Submitted by SK in CV on December 6, 2012 - 4:37pm.

First, with that kind of volume, you meet the requirements, if you jump through the hoops. I think beyond making a timely election, you have to create (or at least act as if you have created) a separate day trading entity. I know some people create LLC's for the purpose though I don't think it's essential. (I could be wrong on that.)

Yes on the retirement plan contributions, though I'm not sure of the current max dollar limits, but you are correct, they are inclusive of other plan contributions from your w-2 employer.

Keep in mind that you will have to pay extra, at very least for medicare tax, and dependent on your income, extra bonus medicare tax on earnings that will in part offset the extra deductions. And you lose the 60/40 LT/ST split for options/futures/forex net gains.

When your 2012 tax return is finished, re-compute as if you had made the election, and see if it works.

Submitted by flu on December 6, 2012 - 4:53pm.

SK in CV wrote:
First, with that kind of volume, you meet the requirements, if you jump through the hoops. I think beyond making a timely election, you have to create (or at least act as if you have created) a separate day trading entity. I know some people create LLC's for the purpose though I don't think it's essential. (I could be wrong on that.)

Yes on the retirement plan contributions, though I'm not sure of the current max dollar limits, but you are correct, they are inclusive of other plan contributions from your w-2 employer.

Keep in mind that you will have to pay extra, at very least for medicare tax, and dependent on your income, extra bonus medicare tax on earnings that will in part offset the extra deductions. And you lose the 60/40 LT/ST split for options/futures/forex net gains.

When your 2012 tax return is finished, re-compute as if you had made the election, and see if it works.

Thanks SK for your input. I think the extra medicare tax I end up paying according to some prelim estimates will be about $2000, but I think it's a wash (no pun intended) because what I could end up reporting as expenses would go more than that.

Also, maybe I'm wrong, but I don't think I would be subject to self-employment tax, right? I think since I am still full time employed by my W2 employer, they've already paid for SS taxes, so I would not need to pay additional self-employment tax on top of that...?

Submitted by no_such_reality on December 6, 2012 - 5:00pm.

Wouldn't you still be responsible for the company share of the self employment FICA tax?

If you have two jobs, you get a rebate on the FICA withheld, but the two companies don't.

Submitted by SK in CV on December 6, 2012 - 6:36pm.

flu wrote:

Thanks SK for your input. I think the extra medicare tax I end up paying according to some prelim estimates will be about $2000, but I think it's a wash (no pun intended) because what I could end up reporting as expenses would go more than that.

Also, maybe I'm wrong, but I don't think I would be subject to self-employment tax, right? I think since I am still full time employed by my W2 employer, they've already paid for SS taxes, so I would not need to pay additional self-employment tax on top of that...?

Correct, no SS portion of the SE tax if your w-2 is already over the SS wage limit. Just medicare, and bonus medicare when earned income goes over $250K. I think that's .9%.

Also as a bonus, you get to deduct above the line what would otherwise be investment interest expense below the line if you buy anything on margin.

Submitted by flu on December 6, 2012 - 7:19pm.

SK in CV wrote:
flu wrote:

Thanks SK for your input. I think the extra medicare tax I end up paying according to some prelim estimates will be about $2000, but I think it's a wash (no pun intended) because what I could end up reporting as expenses would go more than that.

Also, maybe I'm wrong, but I don't think I would be subject to self-employment tax, right? I think since I am still full time employed by my W2 employer, they've already paid for SS taxes, so I would not need to pay additional self-employment tax on top of that...?

Correct, no SS portion of the SE tax if your w-2 is already over the SS wage limit. Just medicare, and bonus medicare when earned income goes over $250K. I think that's .9%.

Also as a bonus, you get to deduct above the line what would otherwise be investment interest expense below the line if you buy anything on margin.

Thank you sir!

Although I knew, this it's pretty self evident that being a solo W2 is a very unfavorable situation to be in the U.S. tax code. But then again, who didn't know that.

Submitted by flu on December 6, 2012 - 7:40pm.

I guess as a followup question.. (before I have to start paying to SK for your invaluable opinion... :) )...

Would running this trading business as a business (since it is a business) allow me to also take reasonable home office deduction. For instance if I were to run/operating my trading platform/computers/logistics out of one dedicated room, and only that one dedicated room (either at my primary home or a second home for instance)... Could I then deduct a portion of

1) utilities
2) insurance
3) property taxes

within "reasonable" means to conduct such business?

And if so, does it make a difference if it is done out of a primary or second home?

I figure if I'm gonna go through the hassle of doing this, I might as well do other things at the same time.

Submitted by no_such_reality on December 6, 2012 - 10:20pm.

SK in CV wrote:

Correct, no SS portion of the SE tax if your w-2 is already over the SS wage limit. Just medicare, and bonus medicare when earned income goes over $250K. I think that's .9%.

Also as a bonus, you get to deduct above the line what would otherwise be investment interest expense below the line if you buy anything on margin.

Yep, he's right. http://www.ssa.gov/pubs/10022.pdf

Imagine that, a person actually getting a benefit over a corporation.

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