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Tax Preparation for Day Traders

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Trader Taxes

Trader tax status (TTS) unlocks meaningful tax benefits for active or day traders who qualify. Our experienced team at Akram CPA Firm can help you determine your eligibility.

Currently, there aren’t straightforward guidelines available for day traders to ascertain whether they qualify for trader tax status. Active or Day Traders need to walk through a subjective, two-part test to determine their eligibility:

  • Taxpayers’ trading activity must be substantial, regular, frequent and continuous.
  • The taxpayer must seek to catch the swings in the daily market movements and profit from these short-term changes rather than profiting from the long-term holding of investments.

Qualifying businesses can claim tax breaks such as business expense treatment, and more. Akram specialize in tax preparation for day traders.

For in-depth information about qualification for trader tax status, please read the article most expensive tax errors make by day traders & tax preparer.

Structuring a Trader Entity

Structuring an entity for trading generates tax savings in excess of entity formation and compliance costs. Day traders solidify trader tax status (TTS), unlock employee-benefit deductions, gain flexibility with a Section 475 election and revocation, and limit wash-sale losses with individual and IRA accounts. Day traders should be considered to incorporate an S-Corp for deducting health insurance and retirement plan contributions. Akram trader CPA Firm can help you to structure a tax efficient trading entity.

Mark-to-Market Election  

Active traders are entitled to make the Sec. 475 ( F) election to use the mark-to-market (MTM) accounting. The 475 ( F ) election converts capital gains and losses into ordinary gains and losses, avoiding the $3,000 capital loss limitation and wash sale adjustment. Sec. 475 ordinary losses offset income of any kind, and a net operating loss carries forward to subsequent tax years. 

Carryback NOLs and Qualified Business Income (QBI) Deduction for Active Traders

The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes significant tax relief provisions for traders. Tax relief applies retroactively to 2018, 2019, and 2020 tax years. It allows TTS traders to carryback NOLs five tax years for 2018, 2019 and 2020. If you have massive trading losses in 2020, a timely-filed 475 election is essential for TTS or Day traders.

TCJA introduced a new tax deduction for pass-through businesses, including sole proprietors, partnerships, and S-Corps. Subject to haircuts and limitations, a pass-through business could be eligible for a 20% deduction on QBI. Day trading is considered a “specified service activity,” which means if the taxable income is above certain threshold, the taxpayer won’t receive a QBI deduction. 

Wash Sale Rules

Day traders also need to pay attention to wash sale rules. A common oversight when obtaining reports for wash sale tax reporting purposes is to rely on broker-issued Form 1099-Bs solely. Although this form provides cost-basis reporting information, it does not give taxpayers a complete picture, especially if the taxpayer has multiple trading accounts or trades equity options. Section 1091 requires taxpayers to calculate wash sales based on substantially identical positions across all their individual accounts, including IRAs.

Akram was Featured in News and Industry Publications

By Lynnlry Browning  on May 6, 2019. The IRS in theory matches the statements to federal returns to root out cheaters. But even though a copy goes to the IRS, “you can’t rely on the 1099-B for your return,” said Muhammad Akram, an accountant and the founder of Akram & Associates in Cary, N.C., which caters to traders and small hedge funds.

Smaller brokerages are more likely to issue statements that misreport basis or dates, Mr. Akram said, because they invest less in the technology required to generate the reports and often don’t use third-party software to tally values. But even Wall Street brokerages have inconsistencies, especially with reporting dividend income, he said. “It’s systemic,” Mr. Akram said. Read full article "Conflicting Tax Forms Create Nighmares for Some Investors" on Bloomberg and Investment News.

Akram was featured several times in Hedgeweek and Privateequitywire

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