Thursday, August 17, 2017
Tags Posts tagged with "Tax treatment"

Tax treatment

traders tax mistakes

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?

Great Seal of the United States.svg

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.

US tax code is a complex maze and consist of 73,954 pages long and includes more than 1,999 different publications and forms.US Tax Code is a Complex Maze for stock traders

 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.

US American tax book facts

 

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.

trading losses minimal trading filling in tax session USA filling

 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.

reporting gains and losses traders experience TAX FILLING

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.

paying self emplyment taxes on trading Tax filling

 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.

tax treatment between forex,options,funds Traders TAX FILLING

 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.

turbo tax for traders tax filling

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.

representing infront of IRS - trader tax filling

 Trader’s Mistake No. 7: Not Forming a Business Entity

forming business entity LLC - Trader tax filling

 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.

MTM Accounting Method - Trader mistake in tax filling

 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 tax status claim - traders mistake in tax filling

 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.

fail to have a clear tax strategy - traders mistakes in tax filling

 

This Infographics is originally published in TradingAcademy