Professional Trader Status

[stealthyc]

A random article I was reading stated this:

To be eligible for claiming TTS, a trader needs approximately four total trades or more per day, trade executions on close to four days per week, with more than 15 total trades per week, 60 trades per month, and 720 trades per year (annualized), per the Poppe court. Average holding periods must be under 31 days per the Endicott court. There are several other factors including having material account size ($25,000 for pattern day trader designation on securities and $15,000 for other instruments), spending over four hours per day, having the intention to run a business to make a living, having trading computers and multiple monitors, and a dedicated home office.

I definitely would not meet those guidelines, though I've seen other sites list slightly less stringent hurdles. These seemed to be based on some court cases though.

 

[UltradoomY]

A random article I was reading stated this:


I definitely would not meet those guidelines, though I've seen other sites list slightly less stringent hurdles. These seemed to be based on some court cases though.

Correct - most indication based on case decisions and guidelines (I read the case notes) were that the individuals only traded for small time periods throughout the year - January and June and were not trading the rest of the year - which is why they listed the numbers of 4 trades / 4 days.
Other cases cited were just that it was substantial and sustained income and trading and not long term holdings.

My thoughts are not to convince any one to do this, just that I am considering it and looking to see if anyone else had done it.

 

[MP3Mike]

This sounds interesting to me, but the majority of my trading is in IRA accounts so I don't think it would make much difference.

If I can grow my taxable account significantly than I would seriously consider some of what has been discussed here, and thank you all for sharing what you have found.

 

[adiggs]

At least the funding side will be straightforward for me - I've already separated the long term holdings out from cash and options in my practical trading, and am not using the long term shares to back anything.


For the C Corp idea @bballshinobi how do the personal taxes plus corporate taxes work out in practice? Thinking out loud - I guess that the lower corp rate will be applied to all of the earnings instead of (my at least) higher tax rate being applied to all of the earnings.

Then I'd get a lower tax rate applied to the salary I pay myself from the C Corp. That lower tax rate might be a lot lower if I'm able to actually pay myself a salary close to our actual living expenses, and don't need to also be planning ahead for big purchases like a down payment on a house (which I would get through a bonus or special dividend sort of idea).


Good info all - I appreciate the insights and ideas. The other thing that is becoming painfully clear to me - I need professional help

 

[bballshinobi]

For the C Corp idea @bballshinobi how do the personal taxes plus corporate taxes work out in practice? Thinking out loud - I guess that the lower corp rate will be applied to all of the earnings instead of (my at least) higher tax rate being applied to all of the earnings.

Then I'd get a lower tax rate applied to the salary I pay myself from the C Corp. That lower tax rate might be a lot lower if I'm able to actually pay myself a salary close to our actual living expenses, and don't need to also be planning ahead for big purchases like a down payment on a house (which I would get through a bonus or special dividend sort of idea).

This will depend on your personal and tax situation. There are a few things you need to consider:

• Your marginal tax rate
• Corp rate = 21%
• Employee FICA + Medicaer tax rate = 7.65%
• Self employment tax = 15.3%
• C Corp maximum retained earnings = $250,000

If you are self employed, your marginal rate = your tax bracket + 15.3%.
If you are an employee (W2), your marginal rate = your tax bracket + 7.65%.

If you already have high income generated by your job/business, then a C Corp setup can make sense. My wife's and my self-employment incomes alone put us in the 24% bracket. However, if I keep trading (I buy/sell options) under my name, our total income is pushed into the 32/35% bracket. This means for every dollar I make through my self-employment business, I am paying 47.3% (32% + 15.3% SE tax) in taxes. Every short-term profit will also get taxed at 32%.

So basically, here what I have done:

• Create a C Corp
• Get a Business Investor account from my broker (Merrill Edge)
• Transfer assets from my personal accounts to the C Crop account
• C Corp can pay me by:
  • Salary (taxed at my personal rate)
  • Benefits / reimbursements (medical, business expenses, etc. - not taxed)
  • Dividend (taxed at 15% on the personal level, but 21% on the C Corp level, so 36% total)
  • Interest payment (taxed at my personal rate)

My income from my business will just have a marginal tax rate of 39.3% now (24 + 15.3) while all my trading will be at 21%.

If your job/self-employment income isn't above the 22% bracket and/or your trading profit doesn't push you up the tax bracket, setting up a C Corp probably doesn't make sense. However, if both incomes are significant, a C Corp can be a good strategy. Talk to a professional CPA/tax planner about your situation though.

 

[adiggs]

This will depend on your personal and tax situation. There are a few things you need to consider:

• Your marginal tax rate
• Corp rate = 21%
• Employee FICA + Medicaer tax rate = 7.65%
• Self employment tax = 15.3%
• C Corp maximum retained earnings = $250,000

If you are self employed, your marginal rate = your tax bracket + 15.3%.
If you are an employee (W2), your marginal rate = your tax bracket + 7.65%.

If you already have high income generated by your job/business, then a C Corp setup can make sense. My wife's and my self-employment incomes alone put us in the 24% bracket. However, if I keep trading (I buy/sell options) under my name, our total income is pushed into the 32/35% bracket. This means for every dollar I make through my self-employment business, I am paying 47.3% (32% + 15.3% SE tax) in taxes. Every short-term profit will also get taxed at 32%.

So basically, here what I have done:

• Create a C Corp
• Get a Business Investor account from my broker (Merrill Edge)
• Transfer assets from my personal accounts to the C Crop account
• C Corp can pay me by:
  • Salary (taxed at my personal rate)
  • Benefits / reimbursements (medical, business expenses, etc. - not taxed)
  • Dividend (taxed at 15% on the personal level, but 21% on the C Corp level, so 36% total)
  • Interest payment (taxed at my personal rate)

My income from my business will just have a marginal tax rate of 39.3% now (24 + 15.3) while all my trading will be at 21%.

If your job/self-employment income isn't above the 22% bracket and/or your trading profit doesn't push you up the tax bracket, setting up a C Corp probably doesn't make sense. However, if both incomes are significant, a C Corp can be a good strategy. Talk to a professional CPA/tax planner about your situation though.

This post, other posts here, and this thread - gold.

Except that gold isn't as valuable.

 

[UltradoomY]

Agree with you @adiggs
My situation is improving with plotting this all out.
Of course I am adding expenses for accounting and other filing fees but I think the overall savings is huge. Plus not having to worry about not having a job.. I would be a bonafide "Professional" lol
I am going to have to figure out when to make the designation, it says you can do it up until the filing date next year - April 2022 but I would want to do it before December 31st to make sure my Mark to Market accounting is superb.
I don't want to start behind on trying to make it work and I think that gives me the best overall set up.

So leaps and other long dated calls would be sold sometime in December and bought back in January.
All positions closed (in the business, not long terms shares held in a different brokerage) and reposition in January.
Renew all professional forum memberships (TMC counts!)
Renew Wingman (it counts)
Purchase new trading set up (yay, researching things to buy is fun anyway)
Lease a new Plaid through my business for professional reasons.... /s

 

[adiggs]

Lease a new Plaid through my business for professional reasons.... /s

OMG! There must be something I'm missing here. Definitely a conversation to have with my (future) accountant.


A serious comment / question - it seems pretty clear that y'all have a professional relationship with an accountant. Questions:
- how did you find them? And what I am really looking for - how would you go about finding one today, knowing what you already know? My wife and I have always done our taxes ourselves (paycheck taxes are pretty simple, even when the paycheck gets large). Also no business ownership experience = no need for an accountant until last year.
- How did you establish the relationship?
- Did you end up working with several before landing where you're at?
- Any particular specialty that you looked for, or would be looking for based on this thread / current needs?
- Do you have a 'point person' (professional) that you use for this stuff, that then refers or farms out pieces of work as needed? (Such as establishing legal entities). Assuming yes - is that your accountant, or somebody else?

C Corp maximum retained earnings = $250,000

I did some reading about retained earnings - its not something I've ever encountered before. My understanding, based on what I've read, is that the C Corp can retain as much as $250k of business profits for the use of the business. The benefit to doing so is that the $250k isn't taxed. As best I can tell is that this is a maximum value for the retained earnings account - not an annual number.

But it does look like a tax free mechanism for growing the pile being used to invest.


Reading about the tax stuff has also gotten a new question going for me - how are the tax rates determined on the different kinds of income? Here's what I mean - if I only had paycheck income of $700k (chosen random to be in the max federal tax rate), then its easy. Each $ gets taxed on the bracket it finds itself in, with the last % (the marginal tax rate) being taxed at 37% plus the other stuff.

But if that $700k has $200k of dividends - does that means I have $500k for income purposes (that gets taxed at whatever that marginal tax rate is up to $500k) and then the $200k is taxed as dividends using the rate starting at $500k (20% I think for the entire range)? Or does the $200k dividends get stacked up "first" (taxed as $0 - $200k) and then the other $500k goes from $200k to $700k and is taxed like that.

Throw in some long term capital gains of $100k, with the long term capital gain rate, and now we have 3 kinds of income (each kind having it's own tax rate and thresholds), that needs to be put together to determine the tax on each $.

I think my state makes this part simple - income is income whether long or short, dividend or not. They just want their 9% (Oregon BTW).

Any pointers to how this gets done?

 

[bballshinobi]

Any pointers to how this gets done?

Jumping in on your other discussions, hope you don't mind.

(1) Write off your Tesla
If you are self employed, you can write off __% of your LEASE payments. The % is based on your business use portion.

Note: Model X qualifies for the "Hummer loophole" (Section 179 of the tax code), and you can write off the entire purchase price at once instead of depreciating the cost over time. For example, buy and take delivery of a Model X in December while keeping your personal car, which you don't sell until January, so you can claim 100% business use for the Model X. If the Model X is $100k and your income that year is $250K, you now get to write off the entire $100k and lower your taxable income from $250K to $150K, which saves you about $40K in tax dollars. You essentially buy the Model X at 40% off.

(2) Finding a CPA
This was hard because most of them just file taxes for you and don't do tax planning. I found mine by asking a friend of mine who does small business service/consulting, so he knows whom his clients use. I paid $300 for an one hour consultation with the CPA.

(3) Taxes
I think the lower rate incomes (dividend at 15% and long term CG at 15/20%) always get stacked "first" like you described . Maybe a professional can confirm. When Tesla starts paying dividend I will let you know

 

[adiggs]

Jumping in on your other discussions, hope you don't mind.

(1) Write off your Tesla
If you are self employed, you can write off __% of your LEASE payments. The % is based on your business use portion.

Then the challenge - what is the business use portion of a car, for a business conducted on a computer for home?

Note: Model X qualifies for the "Hummer loophole" (Section 179 of the tax code), and you can write off the entire purchase price at once instead of depreciating the cost over time. For example, buy and take delivery of a Model X in December while keeping your personal car, which you don't sell until January, so you can claim 100% business use for the Model X. If the Model X is $100k and your income that year is $250K, you now get to write off the entire $100k and lower your taxable income from $250K to $150K, which saves you about $40K in tax dollars. You essentially buy the Model X at 40% off.

My wife and I have been thinking that one of the new Model X's would be a nice upgrade. We're doing periodic day trips of 500 miles. The 220ish range on our Model X is workable but we spend more time than we'd like charging at 3 miles per minute instead of 5-7 miles per minute. The newer 340ish range Model X should solve that particular problem very nicely.

Upgrading at a 40% discount (or more) would be mighty find.

Sort of the same as how moving from Oregon to Washington makes a home purchase "free" (after Oregon state income tax savings). A free home that we want anyway sure sounds like a good deal.

(2) Finding a CPA
This was hard because most of them just file taxes for you and don't do tax planning. I found mine by asking a friend of mine who does small business service/consulting, so he knows whom his clients use. I paid $300 for an one hour consultation with the CPA.

(3) Taxes
I think the lower rate incomes (dividend at 15% and long term CG at 15/20%) always get stacked "first" like you described . Maybe a professional can confirm. When Tesla starts paying dividend I will let you know

I don't like your answer! Can I get a new one please?

 

[bballshinobi]

Then the challenge - what is the business use portion of a car, for a business conducted on a computer for home?

Business use can be things like your trips to visit clients, purchase supplies, etc., but it excludes daily commute and obviously personal driving like trips to the grocery store. This is why you want to take delivery in December while keeping your personal vehicles. Since you still have your personal vehicles, ALL of the new Model X's miles can be classified as business use - just take one trip to Best Buy and buy some printing paper.

Take delivery of New Model X in December 2021. 100% business use for 2021 tax year.
Sell Old Model X in January 2022. New Model X becomes partial business use for 2022 tax year, but doesn't affect your taxes since it was fully deducted in 2021 anyways.

Two things to note though: (1) You will lose the trade-in tax exemption on the old Model X, which equals the value of your Old Model X times your state's sales tax on cars, and (2) When you sell the New Model X later on down the road, you will have to give back the amount you get. For example, you buy the New MX for $100k, and 5 years later sell it for $30K, you need to "give back" $30k deduction for that tax year unless it's part of a trade-in.

 

[adiggs]

Business use can be things like your trips to visit clients, purchase supplies, etc., but it excludes daily commute and obviously personal driving like trips to the grocery store. This is why you want to take delivery in December while keeping your personal vehicles. Since you still have your personal vehicles, ALL of the new Model X's miles can be classified as business use - just take one trip to Best Buy and buy some printing paper.

Take delivery of New Model X in December 2021. 100% business use for 2021 tax year.
Sell Old Model X in January 2022. New Model X becomes partial business use for 2022 tax year, but doesn't affect your taxes since it was fully deducted in 2021 anyways.

Two things to note though: (1) You will lose the trade-in tax exemption on the old Model X, which equals the value of your Old Model X times your state's sales tax on cars, and (2) When you sell the New Model X later on down the road, you will have to give back the amount you get. For example, you buy the New MX for $100k, and 5 years later sell it for $30K, you need to "give back" $30k deduction for that tax year unless it's part of a trade-in.

Ah hah! Now I get it.

That is really helpful. My state has no sales tax so there's no trade-in exemption to lose.


EDIT to add: This sure feels like gaming the system pretty aggressively (I take no stance on this for anybody else - this is a purely personal point of view). I could improve my own view on this by using the business "startup" to also purchase what amounts to a new home office - new desk, chair, computer(s), monitor(s), etc.. And making as many trips in the new car as possible in support of that office setup.

I don't yet have any other ideas for what I can do for business use, but I'd be thinking about that as well.

 

[MP3Mike]

One things that concerns me is if I have gone to all the effort of setting up a corporation, and then the volatility that is making the option trading of TSLA "easy" dries up, what would I do? Find another high conviction/volatility stock to trade?

 

[adiggs]

One things that concerns me is if I have gone to all the effort of setting up a corporation, and then the volatility that is making the option trading of TSLA "easy" dries up, what would I do? Find another high conviction/volatility stock to trade?

It's a real concern, that's for sure. It's something my wife identified almost immediately even though she doesn't participate in the day to day of this.

Something I did awhile back was to go do a few trades (on paper) using Apple. It's not just the volatility - it's also the high liquidity and activity in the TSLA option chain that makes this work. Apple has that latter characteristic as well.


The best I've come up with so far is a larger pile to work with, so that a lower rate of return still works out to a large enough absolute value. The lower volatility should also come with small share price moves where being closer to the share price is no more or less risky. I would also associate that with a steadily shrinking information edge (relative to analysts / wall street) for us as close followers of the company.

 

[generalenthu]

I have been looking to dive into this, and the pointers here have been great. Thanks to all the contributrs, especially @bballshinobi.

I did hear that the 250k max retained earnings is just a loose guideline. As long as you say you need the retained earnings for other investments it's all good. Clearly firms have way more they retain in earnings in excess of 10s of billions, and IRS is not taking them to court for it. The strategy is then to just withdraw what's needed for living expenses and pay the marginal tax on it.

I just purchased this book, and intend to read this to hopefully get a thorough understanding. Reviews welcome if anyone has read it previously.

Green’s 2021 Trader Tax Guide

 

[bballshinobi]

Ah hah! Now I get it.

That is really helpful. My state has no sales tax so there's no trade-in exemption to lose.


EDIT to add: This sure feels like gaming the system pretty aggressively (I take no stance on this for anybody else - this is a purely personal point of view). I could improve my own view on this by using the business "startup" to also purchase what amounts to a new home office - new desk, chair, computer(s), monitor(s), etc.. And making as many trips in the new car as possible in support of that office setup.

I don't yet have any other ideas for what I can do for business use, but I'd be thinking about that as well.

This is the same reason why Tesla see much better sales in Q4 than Q1. Most businesses make major purchase decisions before the end of the year to maximize tax efficiency and cash flow.

 

[adiggs]

I just talked briefly with somebody from Trader's Accounting (Trader Accountants For Active & Day Trader Tax Planning Services - Trader's Accounting) about their service setting these entities up and helping with managing the bookkeeping side. Our conversation was brief - their first criteria they evaluate before going into more depth about possibilities and what might work well, is 700 trades per year. I did clarify that an opening trade followed by a closing trade is 2 trades.

I realized after I hung up that if I open 10 contracts in a single trade ticket - does that count as 1 or 10? Pretty sure it's 1 but I dropped them a question about that. After all - I can turn that into 10 by doing 10 single contract orders. In a trading platform that supports repeating an order I might even be able to automate single contract transactions Though that does sound kind of desperate to me!

The other criteria is that these trades need to be stuff that is held <31 days.


I have no idea how that fits into the other criteria people have been finding from other providers or how defensible this with the IRS or anything else. Simply a point of information for how 1 company that specializes in these sorts of things has structured their practice.

 

[ReddyLeaf]

……just wanted to drop by and wish you good luck, @UltradoomY !

Same here. I’ll follow this thread, but all of my TSLA trades have been in IRAs specifically to avoid tax filing issues. I also do my own taxes, by hand (no Quicken or other software) and even had all schedules up to E in the past. It took me a few years to simplify and I like it so much now that I never want to go back.

Regarding the number of trades per year, I’m surprised by how many trades that I do each week. Three accounts, weekly puts & calls in each, open/close yields 3*2*2*50=600/yr. Throw in a few weeks of scrambling to manage significant SP changes and it sure looks like professional trading. Heck, wouldn’t those BPS, BCS, and ICs count as multiple trades each? Spread those across the daily MMD and one could easily rack up 50 trades per day.

Edit: I’d sure want to have automated trading data dumps into tax software. Not sure how it’s done, but I would seriously evaluate various brokerages for that stuff.

 

[bballshinobi]

Edit: I’d sure want to have automated trading data dumps into tax software. Not sure how it’s done, but I would seriously evaluate various brokerages for that stuff.

Are you talking about the list of all the trades you have done in a given year and a breakdown of the short term and long term capital gains?

 

[UltradoomY]

Just to clarify @adiggs -
I did get professional advice that the open and close of a position is indeed 2 trades, and even better - the contracts are each treated as individual trades.
Meaning if I open 20 BPS and close or roll them - that is 40 trades.
The held less than 31 days is not a rule but more of a sticking point - like "hey look, they didn't even hold them for a month"
However that is suggested for "most" of your activity - not all.
So selling weeklies, or 2 week contracts works and fits perfectly into this.
Still for comfort and to keep with mark to market - I am planning on not holding anything past 12/31 in this account to make things crystal clear.