Are you an US trader? Did mistake in filing tax before?
If Yes, Please continue to read this post. Because you will come across the mistakes you have done before during tax filing session.
Everyone is committing mistakes and we have to learn from our mistakes. Right?
In this post, I’m going to show you some of the chilly mistakes done when filing their taxes.!!
What do you think about US Tax Code?
If you are thinking about lower taxes for the wealthy people may affect our economy, you are absolutely wrong.
Studies shows that there is no relationship between lower taxes for the wealthy people and Economic growth of the country.
How to win this tax Game for your Trading Career?
If you want to win this tax game, you must have proper knowledge and basic understanding of about the US TAX codes. You can learn this easily from blogs, podcasts, ebooks, forums, etc. You can also just ask your friends, mentors about their tax filling.
Trader’s Mistake No. 1: Not Filing a Tax Return Due to Trading Losses or Minimal Trading
Are you having trading losses or Minimal Trading?
If your answer is YES, and you don’t file this activity in your tax return. Then you are under serious consequence of getting penalties.
IRS monitors everything about our trading activity. IRS will penalize you for not reporting your trading activity.
Solution for this Tax filling Mistake:
Start reporting every activity about your trading activity while filing your taxes.
Trader’s Mistake No. 2: Reporting Gains and Losses on Schedule C Instead of Schedule D
Before explaining about this mistake, I will explain you about schedule C and Schedule D.
What is Schedule C in U.S. Federal Tax?
In US Federal Tax, Schedule C is one of the tax filed by most of the sole proprietors, single owner businesses, small business, etc. Usually Schedule C is used to report both income and losses.
What is Schedule D and How it should be used?
Here are the list of things can be filed on schedule D.
- The sale or exchange of a capital asset and Gains from involuntary conversions.
- Non-Business Bad debts.
- Capital gain distributions.
- Non-business bad debts
Most of the US Traders are claiming their losses on Schedule C.
But IRS Code states that all capital transactions must be reported to Schedule D and limiting the traders to claiming only $3000 of losses/year.
Traders Mistake No. 3: Paying Self-Employment(SE) Taxes On Trading
Most of you choose to trade through a business entity such as corporation, LLC, Partnership,etc.
What mistake you do here is you start reporting your trading income as ordinary income. Then you are paying the trading profits as self-employed tax to the IRS.
Listen carefully!! According to the IRS tax code, trading income is not at the earned income. If you are paying self-employment tax, then you are overpaying the tax to IRS.
Trader’s Mistake No. 4: Mixing Up the Tax treatment Between Securities, 1256 Contracts, Forex and Options.
Usually stocks, bonds and mutual funds belong were held more than 5.5years(avg) before 1990’s. But now these are held for only 6months(avg). If you are holding stocks, funds, etc for more than one year, you are taxed at long term capital gain rate.
Futures Contracts are entitles to a special Tax Treatment known as 60/40 split.
Forex can be taxed as earned income.
Trader’s Mistake No.5: Using TurboTax to prepare your tax filing
What is TurboTax?
TurboTax is an American tax preparation software. This software package was developed by Michael A. Chipman.
Depending upon a software for complex tax returns is not good. You should try contacting an experienced firm for tax filing.
Traders Mistake No. 6: Representing Yourself in Front of IRS
Contacted by IRS for an examination?
Start consulting a professional to know about the areas you can get a refund or reduce the deductions.
Trader’s Mistake No. 7: Not Forming a Business Entity
Trader’s Mistake No. 8: Not Filing MTM Accounting Method:
If you want $3000 of your losses, then try to make the section 475MTM election on securities.
Trader’s Mistake No.9: Not Claiming Trader Tax Status
Do you want $5000?
If you are a business trader, you can save $5000 easily using business expense treatment. Failing in claiming the status will cost you thousands of dollars
Trader’s Mistake 10: Failing to Have a Clear Tax Strategy
Every trader should have a clear knowledge about the tax filing, strategy, etc. You should seek experts, read finance blogs, forums, etc to know about the taxing strategies.
This Infographics is originally published in TradingAcademy